MNI INTERVIEW: New BOJ Gov Must Quash Normalisation Talk-Momma

The top priority confronting the new Bank of Japan governor is to correct misguided expectations among mainly foreign market participants that the central bank will move towards policy normalisation, a former BOJ chief economist said.

“Whatever Governor Kuroda says, his remarks will not be believed. The new governor will have to properly and politely explain the stance that the BOJ will maintain easy policy if the new chief thinks so,” Kazuo Momma, who was also the BOJ’s executive director in charge of monetary policy and is now executive economist at Mizuho Research and Technologies, told MNI.

“If the misunderstanding about the BOJ monetary policy is corrected, the functioning of financial markets will surely improve. The new governor should be focused on communication with market players,” Momma said. (See MNI BOJ WATCH: Kuroda Dismisses Market Speculation On YCC Hike)

If the BOJ wanted to scrap yield curve control under the pretext of restoring bond market functioning, then the December or January meeting was the best time to do it but the central bank didn’t do it, Momma said.

That YCC was not scraped sent a clear message that the BOJ will maintain YCC. Therefore, the BOJ has signalled that YCC will remain until the achievement of 2% price target and the BOJ will not scrap YCC until then, Momma said. (See MNI POLICY: BOJ Eyes Inflation Flexibility In Accord Review)

“I don’t know when the BOJ can scrap YCC and I don’t know whether the timing of scrapping YCC comes. If the BOJ became more confident that the achievement of the 2% target is getting closer, the BOJ can do it,” Momma said.

He added that removing the negative interest rate or raising the 10-year long-term policy interest rate clearly means a withdrawal from easy policy, rather than measures aimed at fixing the distorted functioning of financial markets.

“A change of the BOJ governor doesn’t mean a change of BOJ monetary policy. Whoever becomes the governor, if the achievement of 2% price target doesn’t come into sight, BOJ monetary policy will not change,” Momma said.

MARKET DISTORTIONS

The BOJ’s decision to widen the range around its 10-year interest rate target at the December meeting may somewhat contribute to restoring the functioning of financial markets, he said.

However, the reason why the functioning of financial markets remains distorted or has worsened is due to strong speculation mainly among non-Japanese market participants that the BOJ may raise interest rates.

“The BOJ should make it clear that the bank will not change its accommodative policy stance and the 2% price target will not be achieved easily. Market players don’t understand what the BOJ wants to say,” Momma said.

He said that the BOJ’s intentions aren't getting across to market players, especially non-Japanese participants, and the next governor will be required to present a persuasive explanation about its easy policy stance.