MNI INTERVIEW1:BOJ Falling Behind Curve - Ex Dep Gov Yamaguchi

The Bank of Japan should raise its policy rate swiftly as global inflationary pressure has risen, former BOJ deputy governor Hirohide Yamaguchi told MNI.

“The bank should raise the policy rate as soon as possible to get out of negative real interest rates,” said Yamaguchi, now chairman of the advisory board at Nikko Research Center, declining to predict whether the BOJ would hike the 0.75% policy rate at the April 27-28 meeting.

Even with the policy rate raised to 1%, financial conditions would remain accommodative and less effective in curbing inflationary pressures, meaning further rate hikes are needed to push real interest rates into positive territory, he said.

Market pricing for an April move has slipped to about 5% after Governor Kazuo Ueda avoided signaling an imminent increase, though he acknowledged low real interest rates. (See MNI POLICY: April BOJ Rate Hike In Doubt On Slowdown Fears)

Yamaguchi cautioned the Bank risked falling further behind the curve. He also warned of concerns over the “norm of inflation,” arguing a vicious wage-price cycle could become entrenched — a troubling scenario for the central bank.

Yamaguchi left the BOJ in 2013.

SUPPLY SHOCK

Yamaguchi argued it would be inappropriate for policymakers to overlook price rises driven by supply shocks, recalling Japan’s experience during the 1973 oil crisis, often described domestically as a period of runaway inflation.

While prices surged during the first oil shock, the pace of the BOJ’s rate hikes lagged, whereas the bank was able to contain price pressures during the second oil shock through pre-emptive tightening, he said.

He added government subsidies are partially containing price increases, but real prices remain elevated, suggesting Japan is close to stagflation. 

Even with rate hikes to 1% or 1.25%, policy would likely remain below the neutral level, which is difficult to estimate precisely, he argued.

“It is very clear that the policy rate is too low compared with the neutral interest rate. Unless the bank tightens its credit grip clearly, it cannot restrict inflation… upward pressure on inflation will continue,” he said, noting the policy rate should theoretically be above 2%, given the price target and potential growth at about 0.5%. “But the bank will find it difficult to achieve it." 

JGB HOLDINGS

Yamaguchi said the balance of the BOJ's JGB holdings remain elevated, with the stock effect from its large bond portfolio continuing to exert downward pressure on yields and keeping long-term interest rates below where they should be, leaving it behind the curve.

On foreign exchange, he noted the dollar-yen pair has been range-bound as markets assess the BOJ’s tightening path and the rate gap with the U.S., with intervention risks rising if the dollar strengthens beyond JPY160.

The yen may retain a weakening bias given Japan’s soft economic fundamentals, while safe-haven yen buying has significantly receded, he said, adding downward pressure on the yen may continue.