MNI POLICY: Update BOJ Harada: Won't Hesitate to Act If Needed

By Hiroshi Inoue

     KOFU, Japan (MNI) - The Bank of Japan will need to strengthen its easy

policy without hesitation if it becomes more difficult to hit the 2% price

target, policy board member Yutaka Harada said  Wednesday. 

     Harada also warned that the current economic climate and prices may be weak

and October's planned consumption tax hike to 10% from 8% "could push the

economy into recession, and a resultant decrease in demand could push down

prices."

     In his speech to business leaders in Kofu City, Harada, however, indicated

that he see further easing as imminent, adding the BOJ needs to carefully

monitor upcoming data and examine the outlook.

     Following his speech, Harada told reporters that Japan's downside risks are

increasing, but he doesn't think the economy to fall into recession immediately.

     When asked about possible policy tools to cope with a worsening of Japan's

economy, Harada cited more easy policy based on quantitative, qualitative and

interest rates.

     The BOJ board has previously said that lowering short- and long-term

interest rates, expanding asset purchases and accelerating injections into the

monetary base are possible additional easing.

     Harada also said that it is difficult to gauge a worsening of inflation

expectations. He cited a worsening of the economy and permanent weak prices as

some of the main threats to the economy.

     He added, "The (planned tax hike) will not send Japan's economy into

recession but the economy could slow down temporarily."

     At the January 22-23 meeting, the BOJ board kept monetary policy unchanged,

as Japan's economy is expanding moderately despite emerging downside risks.

     The board decided voted 7-to-2 to stand pat on the yield curve control

policy and the asset purchases, maintaining its recovery scenario as a worsening

of economic conditions hasn't been observed through economic data.

     The BOJ vowed to maintain the current easy policy "for an extended period

of time."

     On forward guidance, Harada, former government economist, dissented,

arguing that it would be better to adopt guidance that would "further clarify

its relationship" with the inflation target.

     --MAIN POINTS FROM SPEECH

     --Japan's economy has been recovering due to QQE. "However, there is

concern about the risk of a deterioration in economic activity going forward due

to the fall in stock prices since the end of 2018."

     --Harada also voiced concern over the impact of the slowing Chinese economy

on Japan, saying, "Japan's production and exports are linked with China's

imports. This means that, if China's imports were to decrease, this would be

cause for concern regarding the outlook for Japan's production and exports."

     --"There is a risk that the current sluggishness in observed prices will

spill over to inflation expectations, further delaying inflation."

     --If those risks materialized, "I think it would be necessary to implement

additional monetary easing without delay through quantitative, qualitative, and

interest rate policy measures."

     --"Until last year, there had been debate over financial imbalances and a

potential bubble. However, because stock prices have dropped substantially since

then, it would be rather unreasonable to argue that there are financial

imbalances in the stock market now."

     --"If monetary easing is discontinued, prices will decline, the economy

will deteriorate, and nominal interest rates will decline. Financial

institutions seem to expect that, in the case of a rise in interest rates, only

the rates on investment will increase without any changes in foreign exchange

rates as well as prices of stock and bonds, or a decline in firms' willingness

to borrow. I am afraid this is not realistic."

     --"Premature policy tightening in the past caused economic deterioration, a

decline in both prices and production, and lowered interest rates in the long

run. It can be said to have played a role in creating the challenges faced by

the financial industry today."

     --The economy may be weak, and the same can be said about prices. "Even so,

if the economy continues to recover, the labor market will tighten and prices

will rise eventually."

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

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