BOJ must eye rate hike, shift to more flexible policy, says ex-deputy governor

Reuters reported that the Bank of Japan (BOJ) must make its monetary policy framework more flexible and stand ready to raise its long-term interest rate target next year if the economy can withstand overseas risks, former deputy governor Hirohide Yamaguchi said.

He is considered a candidate to become next BOJ governor,.

He said Japan is already seeing signs of “home-made” inflation, in which broadening price hikes heighten public perceptions that inflation will keep rising longer-term.

Key quotes

There’s a chance core consumer inflation may stay around 3-4% for a fairly long period/”

Once inflation expectations become entrenched, it’s very hard for central banks to control them. That’s a risk the BOJ should be mindful of.”

When prices start rising, it’s very hard to maintain yield curve control” as long-term rates face upward pressure, he said.The remarks contrast with those of Kuroda, who has dismissed the chance of a near-term rate hike on the view the recent rise in inflation will prove temporary.”

The BOJ must also ditch a pledge to keep increasing the pace of money printing until inflation stably exceeds 2%.”

The BOJ must get rid of commitments that bind its policy, so it can respond flexibly and nimbly to changes in the economy as needed.

“I don’t see any necessity to change the BOJ’s joint statement with the government at this moment.”

Yamaguchi served as deputy governor for five years until 2013 under Kuroda’s predecessor Masaaki Shirakawa. The 2013 statement he helped draft commits the BOJ to meet its 2% inflation “at the earliest date possible.”

USD/JPY update

While below the trendline resistance the bias is firmly weighed to the downside.