MNI INTERVIEW2: Ex-BOJ Momma: Must Return To Neutral Guidance

--ECB Policy Review May Be Good Reference Point For BOJ Change: Momma

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan could mull the unwind of its negative

interest rate policy as early as the end of the year, using the European Central

Bank's current framework review as a trigger, a former Bank of Japan chief

economist told MNI in an interview recently.

     The BOJ, like the ECB, continues to battle inflation entrenched below

current goals and as policymakers in Frankfurt debate price targets and the

impact of measures to reach them, central bankers in Tokyo should take the

opportunity to revisit its own policy stance, said Kazuo Momma, now executive

economist at Mizuho Research Institute.

     "The BOJ needs to adjust the forward guidance and to return its policy

stance to a neutral level in order to establish the foundation that enables the

bank to consider abandoning the negative rate policy," Momma said.

     --MAINTAIN TARGET

     Although the BOJ should look to address its policy, it is unlikely to

change its price target from 2%, as there is a concern such a move would lead to

a strengthening of the yen - something Governor Haruhiko Kuroda wants to avoid.

     Momma said the BOJ understood that the side effects of its negative rate

policy will grow the longer the policy is in place and knows it needs to

carefully watch and manage the positives and negative.

     To help with that aim, the BOJ should return its forward guidance to that

of pre-October 2019, dropping the current easing bias for a more neutral tone,

Momma said. Current forward guidance has "increased the hurdle for the BOJ to

abandon negative rates" and amending it would give the BOJ board greater

flexibility to act, he said.

     However, the central bank needed to walk the tightrope of convincing

financial markets that an unwind of negative rates wasn't a sign of a move into

a tighter policy that would send the yen higher, he added.

     --OUTPUT GAP

     In addressing its price target, the BOJ must be certain a positive output

gap is in place, as it is a main pillar behind momentum toward achieving its

price stability target, although the latest quarterly outlook pointed to a

deceleration in Q4, with a risk of a further slowdown in Q1, Momma said.

     The BOJ has maintained that a positive output gap remains a key pillar in

hitting the 2% price target, but, because of the time lag until the output gap

level can be confirmed, it will be sometime next year that policymakers can

actually start unwinding policy

     Japan's output gap narrowed to an estimated 1.02 percentage points in Q3 as

supply tightened and demand firmed, down from 1.03pp fall in Q2, the latest data

showed.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: MMJBJ$,M$A$$$,M$J$$$,MT$$$$,MX$$$$]