MNI INTERVIEW2: BOJ Policy Seen On Hold Despite CPI Rise-Momma

Consumer inflation will continue rising for a further six months, perhaps as high as 3%, as businesses have still to pass higher costs through to retail prices, but Bank of Japan policymakers will hold their nerve and keep policy unchanged, ex-BOJ Chief Economist Kazuo Momma predicts.

“Core CPI this fiscal year on average is expected to rise above the BOJ’s median forecast of +2.3%,” Kazuo Momma, said in an interview with MNI.

Momma believes higher inflation, which he says is expected to rise above the 2.3% BOJ median forecast for core CPI this fiscal year, will be seen by the policy board as fuelled by cost-push factors unlikely to sustain price rises at the 2% target. The BOJ won’t be able to exit its strategy of easy policy until inflation stabilizes around 2% for at least two years, he says. (See MNI INSIGHT: 3% Japan CPI Eyed But Easy Policy To Remain)

U.S. HARD LANDING

Alongside domestic issues, Momma still sees problems ahead stemming from imbalances in the U.S. economy, including a tight labor market driving stubbornly high inflation rates.

“Unless the U.S. economy falls into recession, it will not be able to show a path pointing to inflation falling to appropriate levels,” he said. The former top BOJ monetary policy official expressed concern about a mismatch between the pool of available workers in the U.S. and positions that needed filling, pushing wages higher, which the Fed sees - and the BOJ agrees - is largely an impact of Covid-19. (See MNI INTERVIEW: US Labor Force 'Missing' 2.5M Workers - KC Fed)

Fed officials see unemployment rising from the current 3.5% to 4% as the labour market normalizes post-Covid, but if their assumptions are wrong, they will need to slow the economy significantly, pushing unemployment sharply higher, Momma said. He pointed to comments from former Treasury Secretary Lawrence Summers who believes that, to control inflation, the Fed will need to engineer a recession and that unemployment will need to rise to 7.5%.

“The extreme views are that the mismatch will be corrected completely and the mismatch will not be corrected completely (leaving unemployment at 4% or 7% respectively). I’m in the middle of these and the U.S. unemployment rate could rise to around 5%,” he anticipated.