TOKYO: The Bank of Japan could see the situation deteriorating to begin debate on a new strategy to meet its price target later this year, as the economy shrugs off the blues from the COVID-19 pandemic, according to its board. Member Asahi Noguchi told Reuters.
Still, the central bank may hold off on an extension of stimulus until a shocking event derails Japan’s economic recovery, Noguchi, known as a vocal advocate of aggressive monetary easing, said in April. Said in his first interview since joining the board.
“Once vaccinations go ahead and the economy returns to normal, we will see demand pick up significantly, as households tap into savings accumulated during the lock-down measures,” Noguchi said.
“There is a lot of uncertainty due to the new COVID-19 version. But if everything goes smoothly, we might be able to start the debate (on raising inflation) from the end of this year to next year.”
The comment is the first from a policy maker to specify the time at which the BoJ can shift its focus from dealing with the immediate shock of the pandemic, and back to the long-term issue of how to address low inflation.
Years of over-loosening policy, however, have failed to raise inflation as weak consumption prevents firms from charging more for their goods and services.
Noguchi said if the BOJ is to be further reduced, there will be options to cut interest rates and speed up property purchases.
Under a policy dubbed Yield Curve Control (YCC), the BOJ dictates short-term interest rates at -0.1% and 10-year bond yields at around 0%. It also buys government bonds and riskier assets to achieve its elusive 2% inflation target.
Noguchi said the central bank could also target longer-term returns compared to the current 10 years to further reduce borrowing costs.
Asked whether the BOJ could target 15 to 20-year bond yields in policy easing, he said: “I think so.”
Noguchi is the first BOJ board member to pitch the idea of targeting longer-term bond yields. This view would be contrary to the BoJ’s current view that excessive fall in super-long yields is undesirable as it hurts margins for pension funds.
“There can be various side-effects and costs arising from these steps. Regardless of the side-effects, it will be a call whether we need to take easier steps,” he said.
basic trend key
Noguchi joined a board that had long been divided between members wary of the rising cost of easing and fans of massive incentives.
Some investors saw his appointment as diluting the board’s balance in favor of bold steps to contain inflation.
Noguchi said the BOJ should reduce “without hesitation” if a shocking event pushes the economy into a severe recession. But he said only low inflation should not be the trigger for action.
It is important to “look at the basic trend of the economy” through moves in wages, jobs and the output gap, he said. “It is important to be patient with the very powerful monetary easing at the moment until this trend breaks.”
Noguchi also rejected the dominant market view that he belonged to a camp of academics, believing that with a money wall, central banks could change the public’s perception that deflation would persist.
In addition to limiting borrowing costs, the BOJ is committed to increasing currency printing until inflation “certainly” exceeds 2%, in the hope that the pledge will help raise inflation expectations. Will do
“Personally, I don’t think this commitment has any strong effect on changing inflation expectations,” Noguchi said.
Rather, the pledge was more effective in reducing market uncertainty over the future course of monetary policy, he said.
“This may take some time, but a more realistic policy would be to continually rectify the output gap to sustain the current powerful monetary easing, so that demand increases enough to raise wages and inflation.”
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