MNI INTERVIEW: BOJ Decisions Inconsistent - Ex-BOJ's Yamamoto

Markets are watching Bank of Japan communications more closely than economic data for signals on policy moves, with board decisions seen as inconsistent and driven by convenience rather than fundamentals, former BOJ Executive Director Kenzo Yamamoto told MNI.

“The BOJ has been insisting it is cautiously raising the policy interest rate as underlying inflation still falls short of 2%," said Yamamoto, now head of KY Initiative. “But it scrapped zero rates and lifted the policy rate to 0.5% while underlying CPI inflation stayed below 2%. The policy decisions seem to lack consistency.”

Yamamoto said there is no reason for the BOJ to refrain from raising the policy rate while underlying CPI inflation remains below 2%, arguing that the logic behind its moves is opaque and unverifiable. Markets now watch speeches by board members for signals rather than economic or price data, as the timing of future hikes depends on BOJ thinking rather than forecasts, he argued.

Yamamoto declined to speculate on the timing of the next rate hike, saying it cannot be predicted from economic or price data and instead depends on the BOJ’s internal logic.

TIME HORIZONS

Yamamoto questioned the BOJ’s ability to manage policy based on the Outlook Report’s projection period and its reliance on medium- to long-term inflation expectations, which he said are effectively a 10-year moving average dominated by past price trends.

“If the BOJ wants to boost expectations to 2%, the Bank has no option but to leave high prices alone to anchor them at 2%,” he continued, adding this would also take some time to achieve.

The BOJ has been cautiously managing monetary policy in line with the low inflation outlook presented in its Outlook Reports, he noted. As a result, the Bank had repeatedly implemented significant upward revisions to its inflation forecasts but it has not changed monetary policy, he argued.

Policy should be framed over a two-to-three-year horizon rather than decades, Yamamoto said, calling quarterly Outlook Reports meaningful. The BOJ should focus on headline CPI, which has shown a constant rise in food and energy prices since the 2010s, he argued, adding that averaging one-to-two years of headline CPI is a more appropriate gauge of underlying inflation.

MNI reported the BOJ is considering moving away from its in-house underlying inflation calculation towards headline CPI to lessen market confusion. (See MNI POLICY: BOJ To Mull Phasing Out Underlying CPI) Governor Kazuo Ueda said in May that as global supply shocks become more frequent, “the relationship between headline and underlying inflation will likely remain a major focal point for many central banks.”

BOND BUYING

The government is likely to pressure the BOJ to buy JGBs if yields rise on fiscal expansion, since the central bank has created an environment where fiscal discipline is weak, Yamamoto warned.

The government’s reliance on fiscal spending to counter high prices will lift inflation and add pressure on yields, he said.

Yamamoto has previously strongly criticised the BOJ's bond buying and called in May for the Bank to communicate clearly the pace at which it plans to reduce its JGB holdings. (See MNI INTERVIEW: BOJ's JGB Reduction Pace Vital - Yamamoto)