MNI INTERVIEW: Ex-BOJ's Kameda- Sept Or Oct Hike If Yen 165

The Bank of Japan is likely to raise its 1% policy rate again by December, with a weaker yen approaching JPY165 prompting an earlier move in either September or October, depending on economic conditions and the government's stance, former BOJ chief economist Seisaku Kameda told MNI.

"If the dollar moves close to JPY165, Japanese authorities are likely to conduct foreign exchange intervention, which would push the yen back to around JPY162-JPY163. But if the yen subsequently weakens back toward JPY165, it could accelerate the timing of the next rate hike," said Kameda, now executive economist at Sompo Institute Plus, noting a weaker yen could bring forward the next rate hike to either September or October. 

“When I was asked about the rate hike timing now, the high probability is October. But there is the possibility in December, depending on developments of economy and coordination with the government,” he said, noting a series of consecutive hikes is highly unlikely.

Kameda said the broader trend of yen weakness is likely to continue, although the currency could strengthen modestly if expectations for further U.S. Federal Reserve tightening ease, pointing to Fed Chairman Kevin Warsh's comments Wednesday that risks of higher inflation had receded, potentially reducing the urgency for interest rate increases.

However, he said the BOJ tends to lag behind the curve and the wide interest rate differential between the U.S. and Japan will continue to weigh on the yen.

He also warned the BOJ could not afford to ignore inflation expectations even though crude oil prices have fallen following the U.S.-Iran peace deal. "The Tankan clearly showed that firms continue to pass higher costs on to selling prices, highlighting upside risks to inflation. The decline in crude oil prices is good news, but the BOJ cannot let its guard down against the risk of falling behind the curve."

Kameda had expected swifter action from the Bank in April to combat rising inflation expectations. (See MNI INTERVIEW: Ex-BOJ's Kameda Sees April Hike)

GOVERNMENT INFLUENCE

Kameda said further BOJ hikes were appropriate given persistent upside risks to prices, as policymakers remain focused on underlying inflation. However, he added the BOJ's assessment that the risk of a significant economic slowdown has diminished compared with a while ago is intended to persuade the government to accept further rate hikes. "Looking ahead, the BOJ will continue to emphasise that the economy is unlikely to deteriorate sharply when it raises the policy rate in order to fend off government criticism," he said.

Regarding the July Outlook Report, Kameda noted he will watch whether the BOJ lowers its forecast for core-core CPI and if it maintains concerns about falling behind the curve despite lower crude oil prices.

"The decline in crude oil prices has been somewhat faster than the BOJ assumed in the baseline scenario of its April Outlook Report. On the other hand, the continued weakness of the yen is adding upward pressure to prices. The combination of these positive and negative factors makes it difficult to predict the core-core CPI forecast."

While the BOJ does not define underlying inflation as CPI excluding fresh food, energy and institutional factors, Kameda said this measure is the most important indicator for assessing the risk that underlying inflation overshoots the bank's 2% target.

"The BOJ is always paying close attention to the risk that the economy deteriorates sharply following a rate hike," Kameda said, adding that policymakers must assess whether private consumption loses momentum in the coming months as the impact of firms' price pass-through becomes more fully reflected in consumer prices. The full impact of firms' price pass-through has yet to feed into CPI, he argued, noting the key question is whether consumption weakens as inflation rises.