MNI INTERVIEW: Ex-BOJ's Sekine Sees June Rate Hike
The Bank of Japan will likely raise the policy interest rate to 1% from 0.75% in June, in line with its latest Outlook Report, which placed greater emphasis on upside risks to prices, former BOJ chief economist Toshitaka Sekine told MNI.
“The Hidden PDF warned that if prices continue to rise, the bank must tighten its credit grip sharply, which in turn will have a big adverse impact on the economy,” said Sekine, now a professor at Hitotsubashi University. “The risk from taking a wait-and-see stance has increased obviously.”
The Report's inflation concerns signalled near-term hikes, he added, noting this was reflected in the upward revision to the core CPI forecast for the current fiscal year to 2.8% from January’s 1.9%, indicating officials expect stronger pass-through from higher costs to retail prices. He also pointed to estimates of trend inflation derived from economic models, which have all shown a moderate uptrend, with recent estimates hovering between 1.5% and around 2%.
“The BOJ highlighted that trend inflation has almost risen to 2%. Besides, the bank sees upside risks to it, indicating that it’s a dangerous situation,” Sekine said. He added BOJ economists are increasingly mindful of the risk that a sudden shift in inflation expectations could trigger panic buying, one of the most troubling scenarios for policymakers. Once panic buying emerges, it would likely be amplified by media coverage, quickly reshaping inflation expectations, he said.
Many businesses are being hit by shortages of petrochemical feedstocks, squeezing production and prompting consumers to rush to buy goods amid growing concerns over shortages and rising prices. While the BOJ’s regional economic reports have so far made limited reference to panic buying, the Bank is likely instructing branch managers to intensify efforts to gather information on such behaviour, Sekine said.
Sekine In February expected the Bank to lift rates in March, before the start of the Iranian conflict. (See MNI INTERVIEW: Ex-BOJ's Sekine Sees Potential March Rate Hike)
MARKET PERCEPTIONS
Sekine argued that while Governor Kazuo Ueda is decisive and acts when necessary regardless of the government’s stance, he will cautiously weigh the timing by considering various factors, a position that non-Japanese forex players interpret as a lack of decisiveness.
Overseas investors should instead recognise Ueda’s policy record, including ending the negative interest-rate policy and raising rates three times since taking office, demonstrating he acts when required, he added.
However, Ueda cannot easily or quickly change market perceptions while continuing to communicate in a textbook macroeconomic manner, Sekine argued. “If the BOJ doesn’t raise the rate in June, market players will fully bet on a rate hike in July, meaning the bank will have no choice but to raise the rate in July… it’s not wise,” he said.
Markets have assigned a 75% chance of a move higher next month.
YEN SELLING
Sekine also warned Prime Minister Sanae Takaichi’s communications strategy had encouraged yen-selling by foreign forex investors.
“The government provided subsidies to contain the rise in energy prices and coped with the weak yen through interventions. If the government judges those to be appropriate measures, officials don’t understand macroeconomics. That is the understanding of people who understand macroeconomics,” Sekine said, arguing it is impossible for authorities to keep dollar/yen at levels deviating from economic fundamentals through intervention alone.
The government had effectively attempted to hedge against a slowing economy through a combination of subsidies to offset supply shocks and low interest rates. “That’s the wrong policy,” Sekine argued.
Overseas forex investors perceive Takaichi as sensitive to rate hikes and supportive of aggressive fiscal expansion, including abolishing the consumption tax, he noted. Those perceptions have become convenient justification for yen-selling by foreign investors, Sekine said, adding that unless they change, the yen will remain under pressure, supporting inflation.
