Trial now

Extending small gains


Put spread trades again

--Focus on July Outlook Report Argument, Govt Tax Hike Decision
By Max Sato
     TOKYO (MNI) - The Bank of Japan is laying the groundwork for scaling back
the degree of aggressive monetary easing to make the policy framework more
sustainable and head off excessive investment and a further squeezing of profit
margins for lenders.
     BOJ policymakers have been saying it will take time before the bank can
achieve its 2% inflation target and they must watch both the costs and benefits
of large-scale stimulus.
     The BOJ plans to release the results of its review of why consumer prices
are slow to react to an economic recovery and labor shortages following its July
30-31 policy meeting.
     In addition to that, the central bank is also expected to stress in its
quarterly Outlook Report the points it has been making -- it must ensure its
massive asset purchases and zero to negative interest rate targets will not
cause financial imbalances and that slight adjustments to the easing program
would not amount to a credit tightening.
     "There is a clear setback in board member Harada's view on the monetary
policy outlook," said Shunsuke Kobayashi, economist at the Daiwa Institute of
     Yutaka Harada, a former government economist who joined the nine-member
policy board in March 2015, initially argued that boosting the amount of cash
available for economic activity would push up inflation toward 2%.
     However, in his speech on Wednesday, Harada toned down his reflationist
argument, and instead, sought to justify the aggressive easing launched in April
     He noted Japan's labor productivity growth accelerated at a pace faster
than in the U.S. from 2012 to 2017 and that the growth rate of its real
purchasing power parity GDP per working-age person was the highest among the
Group of Seven major economies during the same period.
     "It was unlike his usual tone. His remarks were more backward-looking and
defensive," Kobayashi said.
     Harada said the already low unemployment rate must fall further to help
push up the below 1% inflation rate toward the bank's stable 2% target. but
carefully added, "I am not saying that monetary easing should continue until the
unemployment rate has fallen to 2%."
     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%."
     He even projected, "We may reduce the degree of easing even before we
achieve 2% inflation if we can confirm that the inflation rate will reach 2%."
     After the July meeting, BOJ Governor Haruhiko Kuroda is likely to repeat
his view that the degree of monetary easing will intensify if the natural rate
of interest -- the interest rate that is neutral to the economy's output gap --
is rising above real interest rates.
     "By using this argument, the BOJ will raise the target for interest rates
if it gets the go-ahead from the Prime Minister's Office," Daiwa's Kobayashi
said. He expects the bank to move at its Oct. 30-31 meeting if the inflation
rate is picking up and the yen is stable.
     "Another key is whether the government delays again its plans to raise the
sales tax in October 2019. If the PMO tells the BOJ that the tax hike will be
postponed, the BOJ can raise rates."
     BOJ board member Takako Masai cautioned in a speech Thursday that the sales
tax hike could have a "significant" impact on pensioners, although the BOJ has
estimated that the drag from the tax hike should be smaller than the impact of
the previous hikes, in 2014 and 1997.
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: