Premature to tighten monetary policy now, says BOJ official

Tokyo

IT IS too soon for the Bank of Japan to tighten monetary policy as the economy has not fully emerged from the pandemic's hit, deputy governor Masazumi Wakatabe said, dousing speculation that creeping inflation could prompt it to tweak yield targets.

Wakatabe said in a speech on Thursday (Feb 3) that consumer inflation may accelerate to around 1 per cent in coming months and could speed up more than expected as more companies seek to pass on higher costs to households.

But the BOJ must maintain its massive stimulus programme as inflation expectations have yet to rise towards the bank's 2 per cent target, he said.

"It would be premature to tighten monetary policy before inflation hits the BOJ's target, as doing so could cripple the economy's recovery," said Wakatabe, who is considered among the most dovish members of the BOJ's board.

Some analysts expect consumer inflation to approach 2 per cent in April and beyond, when the drag from cellphone fee cuts end and as rising global raw material costs trigger more price hikes.

Wakatabe said it won't be enough for inflation to briefly touch 2 per cent for the BOJ to withdraw stimulus, adding that inflation must rise long enough to change public perceptions of future price moves and trigger wage hikes.

"It would be appropriate to tighten policy if wages and inflation expectations spiral higher, and trigger a second-round effect that pushes inflation above our target," Wakatabe said.

"In a country like Japan where medium- and long-term inflation expectations aren't anchored at 2 per cent, the appropriate policy response would be to maintain easy monetary policy."

Under yield curve control (YCC), the BOJ pledges to cap the 10-year bond yield at around 0 per cent via massive money printing to fire up inflation to its elusive 2 per cent target.

Markets are rife with speculation that BOJ could shift its YCC target from the current 10-year to the 5-year bond yields as inflation creeps up, and prospects of steady US rate hikes push up yields across the globe including those in Japan. REUTERS