Free Trial

REPEAT:MNI INSIGHT: BOJ Sets Stage for Rate Hike Before 2% CPI

--BOJ "Normalizes" Its View on Conduct of Monetary Policy
By Hiroshi Inoue
     TOKYO (MNI) - The Bank of Japan board is officially setting the stage for
raising interest rates before achieving its 2% inflation target, by quietly
conveying the message in an obscure paragraph on page two of its policy
statement issued last month, MNI understands.
     There is no immediate need to "normalize" the BOJ's large-scale monetary
easing, with inflation just under 1%, but the BOJ "has normalized its view on
how it should conduct monetary policy" because a majority of the nine-member
policy board is paying more attention to the costs of prolonged easing.
     In its statement issued after the July 30-31 meeting, the BOJ said it aimed
to make monetary easing sustainable by conducting asset purchases "in a more
flexible manner" while promising to maintain super-low interest rates "for an
extended period."
     "The bank recognizes that this will lead to achieving the price stability
target of 2% at the earliest possible time, while securing stability in economic
and financial conditions," it said.
     This paragraph, point number 4 of the statement, "didn't draw much
attention from the markets and media but it shows that the bank's viewpoint on
the conduct of monetary policy has become normal, although the policy in itself
is still far from being normalized," a person who is familiar with BOJ thinking.
     --SOFTENING AGGRESSIVE STANCE
     This means that the BOJ has declared that the bank has "officially"
abandoned the stance of trying to hit the 2% price target "at whatever cost,"
the person said.
     BOJ officials think this is one of the most important messages that the BOJ
intended to send through its latest policy statement.
     They also believe the new way of thinking among the majority of the board
should enable the BOJ to "adjust" the level of interest rates and the pace of
its asset purchases, before achieving the 2% price target, if the side-effects
-- low profit margins for lenders and lost returns on bond investments by
pension funds -- become more serious while the economy continues to recover and
wages grow at a faster pace.
     At the bottom of the statement, the BOJ also said it "will examine the
risks considered most relevant to the conduct of monetary policy and make policy
adjustments as appropriate."
     Previously, the bank simply said it will "make policy adjustments as
appropriate."
     --POLICY COSTS EYED
     The BOJ didn't elaborate on what "the risks considered most relevant to the
conduct of monetary policy" would be, but this means that the BOJ is paying more
attention to the accumulated costs of prolonged easing.
     The BOJ has acknowledged that it is likely to take more time than expected
to achieve the price stability target of 2%, and thus it is necessary to
maintain easing for a prolonged period.
     However, maintaining the easy policy for a prolonged period is already
increasing its side-effects, and it will be too late for the BOJ to take action
once financial imbalances or accumulated costs become serious, BOJ officials
view.
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

To read the full story

Close

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.
}); window.REBELMOUSE_ACTIVE_TASKS_QUEUE.push(function(){ window.dataLayer.push({ 'event' : 'logedout', 'loggedOut' : 'loggedOut' }); });