MNI INTERVIEW: Ex-BOJ's Kameda Sees April Hike

The Bank of Japan is likely raise its policy interest rate to 1% from 0.75% this month to avoid the risk of stagflation and overshooting inflation expectations, former BOJ chief economist Seisaku Kameda told MNI, though he added that it was likely to take a cautious approach beyond its next meeting should Middle East disruption continue.

“About a month ago, I didn’t have a clear idea whether the BOJ would raise the rate in April or in June. But, if anything, the probability of April rate hike has increased, judging from economic and price conditions and other available data, particularly inflation expectations in the March Tankan,” Kameda, now executive economist at Sompo Institute Plus, said in an interview.

While financial market volatility could dissuade the Bank from hiking, Kameda said that officials will be concerned by the danger that inflation expectations could exceed the bank’s 2% target.

The one-, three- and five-year inflation expectations gauges which the BOJ follows most closely all rose, with the three- and five-year gauges hitting historic highs of 2.5%, up from 2.4% in December, despite, again, only partially capturing the Iran effect.

“If the full impact had been incorporated into the expectations, they would have risen further,” Kameda said, adding that while Governor Kazuo Ueda and Fed Chair Jerome Powell have referred to arguments by some central bankers for looking through supply shocks, they are also paying great attention to inflation expectations. The BOJ should act if upside risks increase, according to Kameda.

 “If inflation expectations jump, it could lead to chronic inflation and that could cause prolonged stagflation,” the former BOJ chief economist warned. (See MNI BOJ WATCH: Holds, But Ueda Signals Hike Likely Near)

GOVERNMENT TO STAY QUIET

The BOJ was already on course to raise its rate before the conflict, and would continue on that path anyway should the effects of the war dissipate, he added, pointing to technical work in the Bank’s reviews and working policies which provide justification for tightening.

While Prime Minister Sanae Takaichi has not been seen as supportive of rate hikes, her government will not publicly intervene in the BOJ’s upcoming policy decisions as this could weaken the yen and exert upward pressure on long-term interest rates, Kameda said

“The government doesn’t want markets as its opponent," he said, noting that the government learnt a lesson in December when bond markets sold off on its expansionary fiscal plans.

“Of course, the BOJ is mindful that a worsening of the terms of trade caused by high crude oil prices will tend to slow the economy. So, the bank is likely to take a cautious policy approach after a rate hike in April,” Kameda said.

Kameda said that the BOJ board’s GDP forecast for this fiscal year will be revised down from the 1.0% growth seen in January, making it difficult for the BOJ to maintain the baseline policy view. While the recent Tankan’s diffusion index and capital investment plans were positive, they do not fully include the impact of the conflict in the Middle East, he noted. (See MNI POLICY: Strong Tankan Result To Support April BOJ Hike)

WAGE-PRICE SPIRAL

The BOJ has said that it will continue to raise the policy interest rate to adjust the degree of monetary accommodation “in accordance with improvement” in economic activity and prices.

“One possible view is that if the economic slowdown is temporary, it will not be an obstacle to the timing of achieving the 2% target,” Kameda said.

While the Bank had until recently pinned its hopes on a moderate positive feedback loop between wages and prices in order to achieve its 2% inflation target, it may now be concerned that this cycle does not strengthen too much, he said.