MNI INTERVIEW: Uncertainty To Grip BOJ Board - Sekine

The Bank of Japan's future monetary-policy direction is uncertain and unfolding international trade developments could drive it to either hike the 0.5% policy rate, or implement unconventional easing measures, a former BOJ chief economist told MNI, suggesting policymakers should abandon policy normalisation due to the volatility. 

“This is a nightmare for the BOJ – it is unthinkable that the BOJ moves toward policy normalisation now under the existing conditions,” said Toshitaka Sekine, professor at the School of International and Public Policy at Hitotsubashi University. Sekine, who left the BOJ in 2020, added the U.S. will likely fall into stagflation, which will affect global growth and seriously impact the Japanese economy and inflation.

Bank officials must carefully examine the outlook for the economy and inflation to avoid misinforming policy decisions, Sekine said. “Nobody steps on the accelerator when they cannot see ahead due to heavy storms,” he argued.

The BOJ’s path ahead was uncertain, he warned, noting it could be forced to either raise or implement unconventional easing in the months ahead depending on how the Japanese economy responds, noting policymakers will likely abandon their view that the economy and prices are on track. (See MNI POLICY: BOJ Sees Economic Risks Clouding Rate Hike Outlook)

“Economy and prices were on track until March, and it is meaningless now," he noted. "Bank economists should not stick to the previous assessment, and they must see the matter in a new light.”

Sekine admitted that, due to significant changes in economic and price conditions, he can no longer maintain his stance on the need for policy normalisation and a natural interest rate of around 2% on a nominal basis. In November, Sekine told MNI a 1% policy rate over the longer term “isn’t ridiculous.” (See MNI INTERVIEW: Conditions Exist For BOJ Dec Rate Hike – Sekine)

FED RESPONSE

Bank economists must focus on the evolving U.S. economy, particularly on inflation and growth, which will determine the Federal Reserve’s response, he added, noting the central bank will tighten interest rates if it fears rising inflation expectations. 

This would weaken the yen against the dollar, boost import prices and increase pressure on the BOJ to raise the policy rate, he argued. “There is no evidence of examining them now and the BOJ needs to ascertain the Fed’s policy direction and then examine how strongly the Japanese economy and inflation will be influenced by them,” Sekine said. Despite Jerome Powell's recent unclear comments, markets are betting on a slower U.S. economy and Fed easing, he continued. 

REAL EXPORTS

Sekine is focused on real exports to the U.S. to examine the magnitude of the economic downturn, noting the BOJ monitored the metric as a key early indicator. However, real exports may hold steady in the short term, as firms are unlikely to cancel their trade contracts immediately following the tariffs, he said.

While BOJ officials are closely watching the World Economic Outlook, set to be released by the International Monetary Fund in mid-April, to assess the global economic slowdown and its impact on Japanese exports, Sekine doubted it would sharply revise U.S. growth forecasts, as an American government representative holds a key position within the organisation.