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BOJ Should Eye Exit Steps While Holding Policy, Ex-Official Says

·3 min read

(Bloomberg) -- The Bank of Japan should avoid raising interest rates for now while preparing for an eventual normalization of policy, according to a former BOJ official seen as a possible candidate for deputy governor.

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“This isn’t the time for a drastic rate hike, so there is a limit on what the BOJ can do now,” Yuri Okina, the former official and the chair of Japan Research Institute, said in an interview.

Still, monetary policy must be normalized gradually over the longer term as the significance of a range of policy side effects is continuing to grow, she said.

Okina’s remarks are likely to strengthen the market view that any tightening of policy will come after Governor Haruhiko Kuroda steps down in April. By then a new governor and two fresh deputy governors will be able to take the lead on policy.

Kuroda has repeatedly said he wants to see evidence that inflation will last before backing off from easing. He’s also made clear that policy shouldn’t be tweaked to remedy weakness in the yen.

If wage growth exceeds inflation amid a positive economic cycle that would provide appropriate justification for unwinding stimulus, Okina said, but it’s not clear those conditions will be met soon, she added.

“I’m not certain we are on a path toward a virtuous economic cycle,” Okina said. “There are big downside risks” for the economy including a global slowdown as central banks abroad raise rates at an accelerated pace to cool inflation, she said.

Big rate hikes from the Federal Reserve are likely to keep the yen under downward pressure after it breached the 140 mark against the dollar last week for the first time in 24 years.

“It’s right not to adjust monetary policy on the basis of foreign exchange rates,” Okina said echoing with BOJ’s stance. But the bank should be careful not to invite too much depreciation by emphasizing that stance, she added.

“It’s hard to say that the weak yen at this level is positive on the whole,” Okina said, referring to a comment Kuroda has often made. “There is a huge gap between those hit by it and those who aren’t.”

Japan’s corporate profits jumped to the highest level since 1954 last quarter, thanks partly to a weak yen. At the same time, the currency is contributing to a fall in the purchasing power of households by raising import prices. It’s also weighing on smaller companies by pushing up input costs.

Still, the longer rates stay ultralow, the more the government’s fiscal discipline may loosen, she said. Other mounting side effects include the deterioration in the functioning of markets in the economy and the weakening of profitability in the banking sector, she added.

“The need for normalization is growing in importance,” she said. “Any steps have to be taken extremely carefully.”

Prime Minister Fumio Kishida is widely expected to nominate candidates for the three leadership positions toward the end of this year or early next year.

One recommended task for the new leaders is to conduct a policy assessment that includes a look at the central bank’s price goal, said Okina, who is also a member of Kishida’s new capitalism task force.

“The 2% inflation target is a little too high considering the current potential of the economy and wage growth,” she said.

By clarifying that the inflation target is not just about raising prices, the central bank could avoid the need for extra stimulus when, for instance, price readings fall due to a plunge in oil prices, she said.

“The meaning of the inflation target must be adjusted to make it more flexible for matching the realities of the economy,” she said.

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