BOJ policymaker calls for keeping ultra-low rates, sees risks balanced

BANK of Japan (BOJ) board member Junko Nakagawa said on Wednesday (Mar 1) that the central bank must maintain ultra-loose monetary policy for the time being, as the economy has yet to sustainably achieve its 2 per cent inflation target.

She also said more time was needed to gauge whether the BOJ’s decision in December to widen the band around its 10-year bond-yield target would be enough to iron out market distortion caused by its heavy bond-buying.

“Since our decision in December, there were times (when) distortion in the yield curve eased, while at other times it intensified,” she told reporters after meeting with business leaders in Fukushima.

“As for the impact on the corporate-bond and fund-issuance market, we may need some more time to scrutinise,” she explained, when asked whether the BOJ could take additional steps to ease market strains at its next policy meeting, which is set to take place from Mar 9 to Mar 10.

On broader monetary policy, she stressed the need to keep monetary policy ultra-loose, as it was uncertain whether wages will rise enough for Japan to sustainably hit the BOJ’s 2 per cent inflation target.

“There’s a chance inflation may come under downward pressure if wage hikes don’t spread as much as expected,” she said in a speech to the Fukushima business leaders. “It’s necessary to support the economy with current monetary easing for the time being.”

Markets participants have been trying to gauge whether the BOJ will phase out its massive stimulus by tweaking its bond-yield control policy in April, when incumbent governor Haruhiko Kuroda’s second five-year term ends.

Kazuo Ueda, the government’s nominee to succeed Kuroda, stressed the need to support the economy with ultra-loose policy for now, saying last week that a shift to tighter policy would only come when Japan’s inflation trend accelerates significantly.

With inflation well exceeding the BOJ’s 2 per cent target, the central bank’s implicit 0.5 per cent cap on the 10-year bond yield – set at 0 per cent – has come under attack by markets betting on a near-term interest-rate hike.

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Some investors predict the BOJ could take further steps at next week’s policy meeting to address market distortion caused by its heavy-handed intervention in the bond market.

Nakagawa said the recent acceleration in inflation was driven mostly by a handful of items, such as fuel. She added that inflation will likely slow as the one-off effect of surging raw material costs dissipates.

But she also noted price hikes could intensify if corporate inflation expectations overshoot, and keep the inflation rate elevated for longer than expected.

“When looking at prices, there are both upside and downside factors at play,” she added. “At present, they are evenly balanced.” REUTERS