BOJ panelist calls for steady rate hikes, warns of inflation risk
31/05/2024 06:48
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Japan's wage-inflation dynamics seeing structural changes
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BOJ likely to keep hiking rates, move to quantitative
tightening
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Japan seeing significant risk of inflation overshoot -
Hoshi
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Hoshi sees rise in 10-year JGB yield as 'good sign'
By Leika Kihara and Takahiko Wada
TOKYO, May 31 (Reuters) - The Bank of Japan must
steadily raise interest rates to guard against the risk of
inflation accelerating well above its 2% target, said Takeo
Hoshi, an academic with knowledge of the country's monetary
policy.
Japan's wage-inflation dynamics are changing in ways unseen
in the past with intensifying labour shortages pushing up labour
costs and prodding more firms to hike prices, said Hoshi, an
economics professor at the University of Tokyo.
Having ended a package of unconventional easing steps in
March, the BOJ will keep raising rates to anchor inflation
expectations around 2%, and eventually start quantitative
tightening, Hoshi told Reuters in an interview on Friday.
"Unless the BOJ raises rates, inflation could accelerate too
much. The kind of inflation seen in the U.S. and Europe could
very much happen in Japan," said Hoshi, who has close ties with
incumbent BOJ policymakers.
"There's a significant risk of inflation exceeding the BOJ's
target. That's something the central bank should worry about
from now on," he said.
Hoshi declined to say how soon the BOJ could raise its
interest rate from current near-zero levels, but said hikes
should happen "steadily" given upside risks to inflation.
"In deciding when to shift policy, the BOJ must also take
into account how its U.S. and European counterparts move as that
could affect asset prices including exchange rates," he said.
Hoshi participated in the BOJ's workshop held on May 21,
which was part of a review of the pros and cons of its past
unconventional monetary policy. He chaired a session that
analysed Japan's economic and price developments.
The BOJ ended eight years of negative rates and a policy
capping long-term borrowing costs around zero in March, making a
historical shift away from its radical stimulus.
BOJ Governor Kazuo Ueda has said the central bank intends to
hike rates to levels considered neutral to the economy, as long
as growth and inflation move in line with projections.
Many market players expect the BOJ to raise rates sometime
this year with some betting on action as soon as in July.
Expectations of a near-term rate hike pushed up the 10-year
Japanese government bond JP10YTN=JBTC yield to 1.10% on
Thursday, the highest since July 2011. The benchmark yield stood
at 1.065% on Friday.
Hoshi said the recent rise in 10-year yields was a "good
sign" that showed the BOJ's decision to end its bond yield
control was allowing yields to be driven more by market forces.
But the BOJ must be careful in communicating a strategy for
slowing bond buying, and eventually selling bonds, as the huge
size of its holdings could magnify the market impact, he said.
"One idea could be for the BOJ to communicate how it would
unload its huge bond holdings in, say, 20 years. In doing so, it
needs to remind markets that the plan isn't set in stone, and
could change depending on circumstances," Hoshi said.
Japan's core inflation hit 2.2% in April, staying above the
central bank's target for more than two years, as companies
continued to pass on rising raw material costs to households.
The BOJ has stressed the need to keep interest rates low
until inflation becomes driven more by sustained wage hikes and
robust domestic demand. Ueda has also said inflation
expectations are now around 1.5%, short of the BOJ's 2% target.
(Reporting by Leika Kihara; Editing by Sam Holmes)
((leika.kihara@thomsonreuters.com; +813-6441-1828; Reuters
Messaging: leika.kihara.reuters.com@reuters.net))