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Free AccessREPEAT:MNI 5 THINGS:BOJ Harada:2% CPI Needs Lower Jobless Rate
KANAZAWA, Japan (MNI) - Bank of Japan board member Yutaka Harada on
Wednesday warned against a premature tightening of highly stimulative monetary
conditions, repeating his view that the already low unemployment rate must fall
further to help push up the below 1% inflation rate toward the bank's stable 2%
target.
In his speech to business leaders in Kanazawa City, central Japan, Harada
defended the large-scale easing that the BOJ launched in April 2013, saying it
is not causing excessive lending or investment at this point.
Later he told a news conference, "I think the costs of monetary easing are
smaller than its benefits."
He also denied that the nearly flat yield curve based on the bank's target
of the -0.1% overnight lending rate and the zero 10-year bond yield is not the
main cause of low profitability at Japanese banks but said it is due to low
demand for borrowing as many firms have large cash reserves.
"If the bank were to indeed raise interest rates, bond and stock prices
would decline and the yen would appreciate, leading to a deterioration in firms'
profits, and credit costs would increase, so that private banks would suffer
substantial damage," said Harada, a former government economist who believes
reflationary policy measures should boost prices.
Asked about the BOJ's "inflation-overshooting commitment," under which it
will continue monetary easing until inflation is firmly anchored around 2%, even
if gains in the core CPI (excluding fresh food) overshoot that level for a time,
Harada told reporters, "There is a good chance that the inflation rate will rise
too far above 2%."
"We may reduce the degree of easing even before we achieve 2% inflation if
we can confirm that the inflation rate will reach 2%," he said.
The key points from Harada's speech:
-- "In my view, prices are influenced by a variety of factors; what is
important is that the mechanism through which prices rise works well, and policy
decisions should be made in line with developments in this mechanism. In other
words, additional monetary easing might be necessary if inflation loses
momentum, but otherwise the current policy should be maintained."
-- "Since there is room for further increases in employment and production,
the bank needs to continue with the current monetary policy measures in order to
achieve the price stability target of 2%. Needless to say, it is essential that
the bank continues to constantly monitor for signs of financial imbalances, but
for now, the likelihood of such imbalances is small.
-- To achieve the level of inflation seen in 1992, which was 2.2% in the
core-core CPI (excluding fresh food and energy), the unemployment rate has to
remain at its May 2018 level of 2.2%. "I think that the current unemployment
rate needs to fall further in order to achieve the price stability target of
2%."
The unemployment rate in 1992 stood at 2.2%, but the proportion of young
people was higher at that time, Harada noted. Given that the unemployment rate
among the young is usually higher, and that among the middle-aged is usually
lower, the estimated unemployment rate for 1992 is 1.9% if it is adjusted based
on the demographic structure in 2017, he explained.
-- "I am not saying that monetary easing should continue until the
unemployment rate has fallen to 2%. In conducting monetary policy, the bank
should pay close attention to price developments, and past observations on the
link between prices and the unemployment rate should be regarded merely as
supplementary information to help with making appropriate monetary policy
decisions."
-- The yield curve steepened at the start of aggressive monetary easing in
April 2013. It is probably because easing was recognized as having a positive
effect on inflation expectations and economic activity. "Thus, whether the yield
curve flattens or steepens when short-term interest rates are raised depends on
the economic situation as well as the market's view of monetary policy at the
time. It is therefore wrong to think that if short-term interest rates are
raised, the yield curve will steepen."
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.