BOJ board member calls for keeping ultra-easy policy for now

TOKYO: The Bank of Japan (BOJ) must maintain its ultra-loose monetary policy for now to allow time to see whether the recent rise in inflation will be accompanied by higher wages, its board member Naoki Tamura said on Wednesday.

A former commercial banker, Tamura repeated his view that the BOJ must at some point conduct a comprehensive assessment of its monetary policy framework by weighing the benefits of costs of current ultra-loose policy.

He also warned that Japan’s inflation could overshoot initial forecasts, with services prices perking up and a growing number of companies passing on rising raw material costs to households.

But Japan is now experiencing a “rare” environment in which pent-up demand, driven by huge household savings accumulated during the COVID-19 pandemic, is underpinning the economy even as rising import costs push up inflation, he said in a speech.

“We’re now in a phase where we need to scrutinise whether Japan can achieve a positive wage-inflation cycle. As such, it’s appropriate to maintain monetary easing for now,” said Tamura, who is seen by markets among those in the board more keen to phase out the central bank’s massive stimulus.

The remarks came amid heightening market expectations that recent rises in inflation will prod the BOJ to end its yield curve control (YCC) policy and begin hiking interest rates when dovish incumbent Governor Haruhiko Kuroda’s term ends in April.

Kazuo Ueda, an academic nominated by the government as Kuroda’s successor, will speak in parliament on Friday and next Monday, giving markets their first glimpse of his views on how soon the BOJ could phase out YCC.

Under YCC, the BOJ guides short-term interest rates at -0.1% and the 10-year bond yield around zero as part of efforts to sustainably achieve its 2% inflation target.

Facing pressure from rising global interest rates, the BOJ was forced to raise in December the implicit cap for its 10-year yield target to 0.5% from 0.25% – a move that fuelled market expectations of a near-term tweak to YCC.

Tamura said the BOJ’s decision in December was aimed at minimising the side-effects of YCC and making its monetary easing more sustainable, not at tightening policy.

With the 10-year bond yield breaching the cap, the central bank said on Wednesday it would conduct emergency bond purchases to fend off a renewed market attack on YCC.

“At this stage, it’s important to follow carefully and humbly how markets would stabilise and to what extent market functions will improve,” Tamura said.

He made no mention on whether additional steps could be needed to ease market strains critics say are caused by the BOJ’s huge bond buying.

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