MNI INTERVIEW 1: An Early BOJ Rate Hike Would Be Foolish-Sekine

Any rise in Japanese inflation above 2% will prove unsustainable and should not prompt the Bank of Japan to reduce monetary easing, a former BOJ chief economist told MNI.

While a surge in global energy prices heightened the chances of a "temporary" inflation rate of 2% or more, Toshitaka Sekine said in an interview that changes to the BOJ’s policy stance – the subject of growing market speculation as major central banks tighten – would be a mistake.

"It would be foolish to consider raising interest rates,” he said, adding that premature policy adjustments would prove costly, and that the Bank should instead wait for evidence of second-round effects of higher prices.

“The BOJ should maintain the current easy policy until it achieves its 2% price target in a stable manner as the BOJ has pledged, and the Bank must see evidence of a rise in wages and medium- to long-term inflation expectations,” said Sekine, who left the Bank of Japan in 2020 and is now a professor at the School of International and Public Policy at Hitotsubashi University.

While higher fuel and grocery prices tend to feed household inflation expectations, the BOJ has stressed that it is higher wages that change consumer price views over the medium- to long-term, he noted. Processed foods, which account for 15% of the CPI basket and are closely watched by BOJ economists as a window into economic activities, and services prices, have held stable, he noted.

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PRICES WILL NOT RISE EASILY

"Household inflation expectations have risen in the past when petrol and grocery prices rose, but this wasn’t sustainable,” and did not lead to significant second-round effects such as higher wages, said Sekine.

“I think Japan’s prices will not rise so easily, as BOJ Governor (Haruhiko) Kuroda has said,” he added. Sekine also agreed with the governor’s relaxed attitude to a weaker yen, which the BOJ considers can bolster the economy and prices.

“It is natural and dynamic for market players to make noise about forex moves, but BOJ officials don’t need to be greatly concerned by the recent yen fall,” Sekine said. The BOJ has its "own broad network" in the business community for updates on the impact of the weak yen on businesses, he noted.

Investors are also trying to anticipate whether the BOJ will defend the around 0.25% upper limit of its yield-curve-control range, as the 10-year Japanese government bond yield reaches its highest levels in years. In both 2018 and 2019, the BOJ allowed the 10-year JGB yield to breach the limits of its then range.

But former officials have suggested that the BOJ should only fine-tune its yield-curve control policy if the yen comes under pressure.

Clues to future policy could come in March and July, when the new government of Prime Minister Fumio Kishida will have a say on two key appointments at the BOJ.