MNI INTERVIEW: US Export Demand Key For BOJ Tightening- Sekine

MNI (TOKYO) - Continuing U.S. demand for Japanese exports over the next few months will be crucial for the Bank of Japan to be able to raise its policy rate again, with no further tightening likely before December, former BOJ chief economist Toshitaka Sekine told MNI.

The BOJ will be watching to see whether the U.S. manages to avoid a steep economic slowdown, Sekine, now a professor at the School of International and Public Policy at Hitotsubashi University, said in an interview. 

“The BOJ is unlikely to raise its policy interest rate amid low visibility and volatile markets. I don’t think the low visibility will disperse by the September and October policy-setting meetings,” he said.

Sekine, who correctly anticipated the BOJ’s July hike in its short-term rate target to 0.25%, said there was a danger it could fall behind the curve if it leaves real interest rates below equilibrium levels for too long, feeding inflation and other economic distortions. (See MNI POLICY: BOJ Still On Course For Hikes Despite Volatility)

YEN EFFECT

“I don’t know that the neutral rate of the interest rate is 1% or 2%, but it isn’t at 0.25%. The BOJ may see the need to raise the policy interest rate to at least around 1%, but the Bank doesn’t have a time schedule about the timing of rate hikes,” Sekine said.

Japan’s short-term real interest rate is currently estimated to be around -1.5%, according to BOJ analysis.

While the yen has strengthened over the past month, and is now trading at about 148 to the dollar, versus recent lows above 161, Sekine noted that exchange rate effects on Japan’s CPI are relatively modest.

“As a result of the correction following the yen’s fall to JPY161, the upside risk to prices is becoming smaller qualitatively. But the BOJ should pay attention to the risk stemming from a prolonged very low short-term real interest rate,” he said.

In its October Outlook Report in 2016, the BOJ estimated that a 10% yen depreciation would add only about 0.1 percentage point to CPI, less fresh food and energy. While this pass-through ratio might since have risen as the import penetration ratio has increased, BOJ officials see no need to revise the estimates for the moment.