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REPEAT: BOJ Masai: Must Watch Costs, Benefits of Easing

Repeats Story Initially Transmitted at 06:42 GMT Dec 6/01:42 EST Dec 6
--Adds Comments From Briefing Throughout
     KOBE, Japan, (MNI) - The Bank of Japan must watch both the costs and
benefits of the aggressive monetary easing it has been conducting since April
2013, BOJ board member Takako Masai said Wednesday.
     In a speech to business leaders in Kobe City, western Japan, Masai also
said the central bank needs to keep real interest rates at low levels to
stimulate economic activity and guide low inflation, still below 1%, to a stable
2%.
     Later, she told a news conference that no excessive asset price swings have
been observed under the current easing program.
     "Generally speaking, if easy policy is prolonged, side-effects would be
seen in a worsening of market functioning, a rise in asset prices and a
worsening of the banking system's intermediation function," she said.
     But so far, Masai said, liquidity and trading volumes in the Japanese
government bond market have not shown any further deterioration. The BOJ's
massive purchase of JGBs in recent years has already lowered the bond market
function.
     "The risk of banks' intermediation worsening is low because banks have
sufficient capital bases," she said.
     She repeated the BOJ's official line that large-scale purchases of
exchange-traded funds is part of the easy policy aimed at lowering risk
premiums, which is a necessary for achieving the inflation target.
     In her speech, Masai said, "In order to achieve the 2% price stability
target in our country, we need to wipe out the deflationary mindset and
establish, for the entire society, the norm that prices and wages will rise
about 2% every year."
     As to why the BOJ thinks it is necessary to lower interest rates to very
low levels, Masai said the basic mechanism of monetary policy is to keep real
interest rates below the natural rate of interest, which is neutral to growth
and inflation.
     "The natural rate of interest in Japan has been trending down, reflecting
the decline in the potential growth rate of the economy," she said, adding that
BOJ staff estimates the natural rate of interest is around zero.
     The BOJ has so far failed to achieve the 2% inflation target because the
deflationary mindset among households and businesses has been more stubborn than
expected.
     "Having said so, I think there is no change to the need for conducting
strong monetary easing -- that is, to keep real interest rates well below the
domestic natural rate of interest," Masai said.
     "On the other hand, since it has been nearly five years since the
quantitative and qualitative monetary easing was introduced, we must carefully
watch both its effects and side-effects,"
     In her speech, Masai didn't say what side-effects the BOJ needs to monitor
but other board members have said keeping interest rates too low is squeezing
profit margins for lenders, which could hurt their financial intermediation
function.
     At their last policy meeting on Oct. 30-31, many BOJ board members saw no
need to reinforce already large-scale monetary easing, arguing that the
side-effects of additional accommodation would exceed the benefits, the summary
of opinions at the meeting released last month showed.
     At the October meeting, the BOJ board decided in an 8-to-1 vote to maintain
its current monetary easing stance under the yield curve control framework it
adopted in September last year.
     In addition, weak price data prompted the board to lower its projections
for consumer prices in fiscal 2017 and 2018, but the BOJ stuck to its latest
timeframe that it can achieve its 2% inflation target "around fiscal 2019"
ending in March 2020.
     Under the yield curve control framework, the BOJ is seeking to stabilize
the 10-year government bond yield, the benchmark for long-term borrowing costs,
at around zero percent and keep the overnight interest rate at -0.1%.
     Masai said the Japanese economy is expected to continue expanding
moderately based on balanced domestic and overseas demand but she also warned
about the slow pace of increase in consumer prices.
     "I think downside risks to economic activity are limited. But downside
risks to prices are considerably high," she said, basically repeating the
board's analysis presented in its quarterly Outlook Report issued on Oct. 31.
     "This is because of the high uncertainty over how corporate stances on
raising wages and prices will spread in the future."
     Later, Masai told reporters that if downside risk to prices increased, the
BOJ would examine the reason and consider how to respond.
     In the face of labor shortages, transport firms and restaurant chains are
raising wages and prices but some firms are refraining from raising retail
prices and wages as they are absorbing higher costs through an increase in labor
productivity.
     Masai in the speech noted that the globalization and digital innovation are
pushing down prices in industrialized economies.
     Japan's national average core CPI (excluding fresh food but including
energy prices) rose 0.8% on year in October, the 10th straight year-on-year
rise, after +0.7% in September.
     Excluding the upward pressure from energy prices, the underlying price
trend has shown a slow improvement. The CPI excluding fresh food and energy (the
core-core CPI) rose 0.2% on year in October, after rising 0.2% in September.
--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com
--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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