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Earliest BOJ Shift May Come in Mid-2023, Ex-Board Member Says

·3 min read

(Bloomberg) -- The Bank of Japan could start normalizing policy as soon as the middle of next year, according to a recent former board member known for his strong support for aggressive monetary easing.

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“It’s possible that inflation accompanied by wage growth will be confirmed by then,” said Goushi Kataoka, who left his position at the bank in July after a five-year stint. “But it’s a narrow path. It would almost be a miracle.”

The remarks from the former dovish outlier on the central bank’s board demonstrates how views on Japan’s inflation dynamics are shifting among some experts after more than a decade of deflation and price weakness.

Kataoka, who consistently suggested the central bank should take additional easing action at policy meetings, acknowledged the country’s price gains have been stronger than he expected.

BOJ Board Has Shifted a Tad Toward Neutral

“A wide range of cost-push pressures have materialized more than I expected,” Kataoka, currently chief economist at PwC Consulting, said in an interview on Friday. “There’s hope that a big shift in Japan’s deflationary mindset will take place. What used to be common sense based on past economic experience could change very quickly.”

The BOJ has steadily upgraded its inflation forecast for this fiscal year. The bank’s latest projection is a 2.3% gain, more than double the pace of its January prediction of 1.1%. Since then, Russia has invaded Ukraine, and the yen has continued its rapid slump against the dollar.

Citigroup and SMBC Nikko Securities are among those expecting 3% inflation later this year. Kataoka also said that level is in sight.

Traders are watching to see if the BOJ, an outlier among central banks in advanced economies, will follow the Federal Reserve and the European Central Bank by pivoting toward tightening in response to stronger-than-expected inflation.

While he sees the possibility of that happening next year, Kataoka at least expects Governor Haruhiko Kuroda to keep easing through the end of his term in April. That stance is necessary even if public discontent intensifies over higher price gains before wage growth manages to catch up, he said.

On Friday, Kuroda helped ease downward pressure on the yen that is fueling some of the price growth by signaling his frustration over recent rapid moves. They are unfavorable for the economy, he said after holding a meeting with Prime Minister Fumio Kishida.

Kuroda Meets Kishida as Japan Warns Against Abrupt Yen Moves

Yet so far the governor has given no hint of an imminent rate hike, after he ruled it out as an option to stop the yen’s slide. Kuroda argues that an increase in rates will do harm to the economy -- a point Kataoka echoes.

“A warning sign is flashing over the global economy,” Kataoka said. While Japan’s inflationary environment may change, “a rate hike would end up creating headwinds both at home and abroad.”

Regarding the policy trajectory after Kuroda, Kataoka said an important point is whether Japan’s price trend shows a clear deceleration in the first half of 2023 as currently predicted by the BOJ.

If companies continue to pass their costs onto consumers next year and nominal wage growth of around 3% looks set to last in a sustainable manner, the central bank could unwind stimulus, he said.

“The task for the next governor is crystal clear -- it’s to firmly inherit Kuroda’s legacy, achieve the stable 2% inflation target early, and move on to the next phase,” he said. “We can’t have someone who gives up because the target seems unattainable.”

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