MNI INTERVIEW2: BOJ Stands Ready To Fight Yen Fall - Momma

The Bank of Japan will act against an extreme deprecation of the yen, evident in the recent adjustment of the Bank's forward guidance by Governor Kazuo Ueda, a former BOJ chief economist told MNI.

The new guidance is easy to understand and well-balanced, according to 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. “The reference of ‘while nimbly responding to developments in economic activity and prices as well as financial conditions’ includes regret that the BOJ experienced last year,” Momma said. The weak yen last year illustrated the side-effects of YCC and the BOJ had learned a severe lesson, he explained.

PRICE TARGET DOUBTS

Momma said that the reference of “the BOJ will patiently continue with monetary easing” showed the Bank aimed to achieve its 2% price target.

He added the policy statement illustrated that Ueda will avoid surprising market players and that he aimed for a high level of transparency on his monetary policy thinking. “Governor Ueda does not make a surprise attack and market players can take his words at face value,” he commented.

Momma said inflation had printed stronger than expected and the BOJ underestimated core CPI this fiscal year. The Bank will likely revise its price view up from 1.8% growth in July when the board updates its forecasts. He said that the y/y rise of core CPI this fiscal year will tip about 3%. “The y/y rise in core CPI will not fall as much as the BOJ predicted and strong prices will have positive impact on wage negotiation next year,” Momma said.

But he added that the board’s core CPI forecasts showed weak confidence among policymakers on achieving the 2% price target, despite forecasts which track close to the level. “A virtuous cycle of prices and wages could work, although the possibility of working the cycle was zero,” he explained. “The core CPI will not fall below 2%, although the BOJ expected it.”

ROAD AHEAD

The road to the 2% price target exists, but the BOJ will carefully examine the possibility – bank officials’ expectations are low, he noted. “The low-inflation regime for the past 30 years will not change easily,” Momma argued. “I think so and the BOJ also thinks so. I expect Japan’s inflation rate to fall to low levels and the probability is high that 2% price target will not be achieved.”

Momma believes a tweak to the BOJ's monetary policy could happen by year's end (see: MNI INTERVIEW1: BOJ Policy Tweak By Year End Possible -Momma).