MNI INTERVIEW: Ex-BOJ's Yamamoto Urges Quarterly Hikes

The Bank of Japan needs to raise the 0.75% policy rate at a quarterly pace, as slower biannual increases have contributed to yen weakness and JGB selling pressure, former BOJ Executive Director Kenzo Yamamoto told MNI.

“Looking ahead, it is appropriate for the bank to accelerate the pace of rate hikes. The BOJ did not raise the policy rate consistently or in a timely manner and, consequently, it is now paying the price through yen and JGB selling,” said Yamamoto, now head of KY Initiative.

Rate hikes to date have had limited impact on the economy and prices because ample liquidity has mitigated the tightening effect, he argued, noting increases will not produce meaningful results unless the pace accelerates. He did not elaborate on the timing or magnitude of future hikes, noting the bank has little choice but to scrutinise the pace and terminal rate by carefully examining the impact on economic activity and inflation.

However, Yamamoto said the current policy rate remains considerably distant from the neutral and terminal rates, adding that quarterly hikes may be more appropriate than moves spaced every six months. The BOJ’s modest tightening pace also risks being interpreted as tolerance of relaxed fiscal discipline, he warned.

The rise in long-term interest rates has been restrained by the low policy rate and the stock effect of the BOJ’s bond holdings, he said, adding that long-term yields may initially rise before stabilising as tighter policy helps ease inflation, should the bank accelerate rate hikes.

Once the 2% price target is achieved, it would not be unusual for the 10-year JGB yield to move into the upper 2-3% range, he added. “If the BOJ leaves rapid JGB moves alone, it could face criticism. But it will also face a difficult challenge in deciding how to cope with them,” Yamamoto said, warning against easy intervention to curb rising yields.

PERCEPTION GAP

Yamamoto also noted the BOJ should address the gap between its price assessment and public perceptions.

“There is a big gap between prices that the public realise and underlying CPI inflation that the BOJ is focused on. The BOJ should ask itself if the bank’s insistence is appropriate as the public are considerably suffering high prices,” Yamamoto said, echoing criticism he made in September on confusing bank communications. (See MNI INTERVIEW: BOJ Decisions Inconsistent - Ex-BOJ's Yamamoto)

The BOJ bases policy on underlying CPI, which excludes temporary factors and is difficult for the public to understand, he noted. As more items are excluded, the measure diverges further from lived price experience. “Headline CPI has stayed above 2% for roughly 45 months, but the BOJ discounts this based on its view of underlying inflation. People, however, are troubled by high prices. There is a big perception gap,” he said, adding this suggests the BOJ is behind the curve.

Lingering price pressures have prompted government subsidies and consideration of fiscal expansion, which he warned would ultimately add to inflation. The essential response to high prices should be tighter credit conditions and restrained fiscal spending.

The government and the BOJ have been implementing the opposite measures, Yamamoto concluded.