MNI INTERVIEW: Global Risks Mean BOJ Must Stay Easy - Sekine

The increased risk of a global slowdown as the Federal Reserve hikes rates and the absence of sustained wage growth mean the Bank of Japan has no option but to maintain its current easy policy stance, its former chief economist Toshitaka Sekine told MNI.

While recent weakness of the Japanese yen as U.S. rates rise has prompted speculation that the BOJ could adjust policy centred around a 0.25% cap on the 10-year government bond yield as early as next month, Sekine, chief economist until 2019 and a consistent defender of the yield curve control framework, said that the central bank had to look through exchange rate changes.

“The BOJ shouldn’t be glad when the yen rises or sad when it falls, or be influenced by market speculation, although non-Japanese players may again press for policy adjustments in September,” Sekine, who was head of the BOJ’s Institute for Monetary and Economic Studies until 2020 and is now a professor at the School of International and Public Policy at Hitotsubashi University, said in an interview on Tuesday. (See MNI INSIGHT: BOJ Eyes Autumn Move If Yen Steadies, Prices Rise)

While consumer price inflation has surpassed the BOJ’s 2% target recently, it is neither sustainable nor accompanied by strong increases in wages, he said.

TIME TO WAIT

“There is the risk that global economy may fall into recession and there is no reason for the BOJ to raise interest rates at all,” Sekine said.

Unlike the Fed and the European Central Bank, which are both moving to contain inflation well in excess of their targets, the BOJ is able to wait to see whether there is a satisfactory increase in regular workers’ scheduled wages, he said.

Regular workers’ scheduled earnings are now rising at only about 1% from a year earlier, the same level as before the Covid-19 pandemic, he noted.

“If this number shows signs of moving toward 2%, the BOJ will be confident of achieving the 2% price target,” Sekine said. “The bank doesn’t need to rush.”

While the BOJ has incorporated a slower global economy and lower commodity prices into its Outlook Report, this does not anticipate a world recession, he noted.

But it is hard to judge how much the Fed will continue to raise interest rates, given its struggles to anticipate the behaviour of core CPI and wages, Sekine noted, adding that Fed researchers have lost credibility in the process.