By Max Sato
TOKYO (MaceNews) – The Bank of Japan is likely to maintain its “flexible” Japanese government bond purchase program as a “fine-tuning tool” so it can respond to both upside and downside risks to growth and inflation, instead of clearly reducing JGB buying from the current monthly pace of about ¥6 trillion, Takahide Kiuchi, a former BOJ board member said.
Market participants are bracing for a possible decision by the bank to lower the footnote guideline of its JGB purchases of “about ¥6 trillion per month,” but Kiuchi pointed out that the BOJ has already been flexible about its asset purchases in line with bond market conditions.
“I think they can make (bond buying operations) more flexible but it won’t be QT (quantitative tightening) even if they reduce the monthly purchase amount,” said Kiuchi, executive economist at Nomura Research Institute, who was a BOJ board member from 2012 to 2017. “If the yen depreciates, it could reduce its JGB purchases and allow the 10-year yield to rise. Or if the yield rises, it could increase its JGB purchases. The bank wants to keep it as a fine-tuning tool.”
“I think the BOJ will save an FRB-type balance sheet reduction until it raises the short-term rate first as part of its normalization process,” he said. “QT is unlikely in the near future.”
Ahead of the bank’s two-day policy meeting ending Friday, Kiuchi also told Mace News in an interview that the BOJ is likely to raise the short-term interest rate three more times as part the process to normalize its policy but the terminal rate will be around 0.75% (a 0.15-point hike plus two 0.25-point hikes) or 0.85% (three 0.25-point rises), short of 1%, as inflation could settle below the bank’s 2% target.
The BOJ’s nine-member board is widely expected to vote unanimously to leave the overnight interest rate target in a range of zero to 0.1 percent for a second straight meeting this week after conducting its first rate hike in 17 years and ending the seven-year-old yield curve control framework in a 7 to 2 vote in March.
To smooth out the number, the next rate hike could be by 15 basis points (0.15 percentage point) to 0.25%, instead of by 25 bps (0.25 point) to 0.35%, Kiuchi said.
Some market participants expect the BOJ to raise the overnight rate again in July but Kiuchi sees the next move is more likely to be in September and he expects that the bank may be able to raise one more time by year-end unless consumer spending slumps further amid elevated costs and exports shrink fast in tandem with cooling U.S. economic growth.
“The BOJ ended the negative interest rate policy on the assumption that 2% inflation will be achieved, but basically, the low interest rate environment has not changed,” Kiuchi said. “BOJ policy change alone is unlikely to trigger an economic slump. It is not monetary tightening; its more like moving policy back to neutral.”
The current inflation rate around 2% is largely stemming from higher import costs, first by brought on by global supply constraints, and then fueled by the persistently weak yen that is eroding Japan’s purchasing power, Kiuchi said. This has kept real interest rates below zero in Japan, adding downward pressures to the yen and pushing up asset prices, but super-low borrowing costs are not boosting economic activity, he said.
“I think inflation expectations will eventually fall,” Kiuchi predicted. Currently, he said, firms expect prices to rise around 2% annually and households foresee 5% while bond market conditions point to a 1.5% break-even inflation rate (the 10-year JGB yield minus the 10-year inflation-indexed bond yield).
There is a possibility that the BOJ’s gradual rate hikes could cause an indirect negative impact on the economy if the yen reserves its weakness and appreciates at a pace more than 10% annually toward what seems to be a more neutral level of around Y110 to the dollar, causing stock prices to fall and hurting sentiment, Kiuchi said.
Several years ago, Kiuchi and Takehiro Sato, his fellow former private-sector economist, were the last remaining dissenting voices on the nine-member policymaking panel, which adopted an explicit 2% inflation target in January 2013 under political pressure and began aggressive monetary easing under a new reflationary governor three months later.
—
Content may appear first or exclusively on the Mace News premium service. For real-time delivery in entirety contact tony@macenews.com. X (Twitter) news-flow headlines @macenewsmacro.