MNI INTERVIEW: Near-Term Inflation Risks Rise-Ex BOJ Economist

Yen weakness and price hikes by food manufacturers mean short-term upside risks to inflation are greater than forecast by the Bank of Japan in April, recently-departed BOJ chief economist Seisaku Kameda told MNI, adding that the central bank’s current 2% price stability target remains appropriate.

Core CPI this fiscal year could exceed the BOJ board’s median forecast of +1.9%, and be higher than the 1.1% foreseen for fiscal 2023, Kameda said in his first media interview since leaving the BOJ on May 8. But policy makers are likely to stick to their view that the rise in inflation is temporary, so long as it is driven by higher prices for energy and food, and not by wage hikes.

“Bank officials are more focused on the mechanism behind the price rise, rather than the actual length of the period of high inflation,” he said. “The BOJ does not consider 2% inflation achieved only by cost-push to be consistent with its price stability target.”

Despite calls from some quarters for the BOJ to alter its framework, Kameda said the current 2% price stability target is sufficiently flexible. (See MNI INTERVIEW: BOJ Should Review 2% Target-Ex Senior Official)

“Future changes in monetary policy or in its forward guidance, if necessary, could be implemented under the current (price stability) target. The BOJ already considers the 2% target as a medium-to-long-term goal,” said Kameda, now senior advisor to Sompo Group CEO and executive economist of Sompo Institute Plus.

LITTLE RECESSION RISK

While there is broad theoretical consensus that monetary policy should pursue a positive level of inflation, and most major central banks have targets around 2%, Kameda acknowledged that there had been little detailed work to determine the optimal target level. But there would be little advantage to the BOJ from departing from the international norm, he said.

Even though dearer petrol and food are weighing on households, putting downward pressure on the economy as real wages fall despite increases in nominal terms, an expected post-Covid bounce should mean there is little risk of recession, he said.

“Utility bills for gas and electricity will only begin to reflect the spikes in crude oil and the U.S. dollar since March with a time lag, keeping consumer prices at high levels at least for this fiscal year,” Kameda said, adding that “the positive effects from nominal wage rises would be more clearly felt only after the cost push inflation wanes.”

The weaker yen is also likely to continue to drive higher prices for durable consumer goods, given the proportion of imports in household appliances and other products, he said.

Exchange rate volatility as the BOJ defends its yield target is reducing the positive impact of a weaker yen on the economy as a whole, Kameda said, pointing to the BOJ’s warning in its January Report that rapid currency moves in any direction may have a detrimental effect.

But the BOJ will likely maintain its potentially unlimited fixed-rate government bond purchase operations, which were announced in April in response to speculation by investors testing the 0.25% yield cap on the 10-year government bond, he said.