Incoming BOJ chief says low rates remain appropriate - for now
Send a link to a friend
[February 24, 2023] By
Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) -Incoming Bank of Japan (BOJ) Governor Kazuo Ueda said
on Friday the central bank must maintain ultra-low interest rates to
support the fragile economy, warning of the dangers of responding to
cost-driven inflation with monetary tightening.
While signalling the chance of tweaking the BOJ's bond yield curve
control (YCC) in the future, Ueda said the bank needed to work out the
right timing and means to do so, a sign the new chief will be in no rush
to overhaul the controversial policy.
Speaking to lawmakers, Ueda said the recent rise in inflation is driven
largely by rising raw material import costs, rather than strong demand,
adding the outlook for Japan's economy was highly uncertain.
Global bond yields fell and Japanese stocks rallied as Ueda's emphasis
on patience and continuity in policy tempered some market expectation
that he might seek to make a hasty exit from the extreme monetary
stimulus of his dovish predecessor, Haruhiko Kuroda.
"It's standard practice to act preemptively to demand-driven inflation,
but not respond immediately to supply-driven inflation," Ueda told a
lower house confirmation hearing.
"Japan's trend inflation is likely to rise gradually. But it will take
some time for inflation to sustainably and stably achieve the BOJ's 2%
target," he said.
"It's true there are various side-effects emerging from the stimulus.
But the BOJ's current policy is a necessary, appropriate means to
achieve 2% inflation."
The yen was volatile, swinging between gains and losses against the
dollar as investors parsed through Ueda's comments. It was last off
0.03% at 134.76 per dollar.
Earlier this month, the government named the 71-year-old academic as its
pick to become next central bank governor in a surprise choice that
markets initially saw as heightening the chance of an end to the
unpopular YCC policy.
With inflation exceeding the BOJ's target, Ueda faces the delicate task
of phasing out YCC, which has drawn public criticism for distorting
market functions and crushing banks' margins.
"There are various possibilities on what YCC could look like in the
future," he said, adding that there were side-effects emerging from the
policy such as deteriorating market function.
But he said for now, the BOJ needed to monitor whether the measures it
took in December, such as widening the band around its yield target,
will help ease the side-effects.
Ueda's caution against shifting policy too soon was echoed by Shinichi
Uchida, a career central banker and the government's deputy BOJ governor
nominee, who said it was inappropriate to tweak ultra-loose policy just
to deal with its side-effects.
[to top of second column] |
The Japanese government's nominee for
the Bank of Japan (BOJ) Governor Kazuo Ueda speaks during a hearing
session at the lower house of the parliament in Tokyo, Japan,
February 24, 2023. REUTERS/Issei Kato
"The BOJ's current interest rate target levels, including the
negative short-term rate, is appropriate. If Japan can foresee
inflation reaching 2%, the target levels could be reviewed. But that
won't come immediately," Uchida told lawmakers in the same
confirmation hearing.
EXIT POSSIBILITIES
Targeting shorter-maturity bond yields, rather than the current
10-year yield, may be among options, though there are various other
ideas if the BOJ were to tweak YCC in the future, Ueda said.
"If trend inflation heightens significantly and sustained
achievement of the BOJ's 2% target comes into sight, the central
bank must consider normalising monetary policy," Ueda said.
In phasing out stimulus, the BOJ would do so by raising interest
rates on financial institutions' reserves parked with the central
bank rather than selling bonds, Ueda said.
Upon approval by parliament, Ueda succeeds incumbent Kuroda, whose
second, five-year term ends on April 8.
"Overall Ueda is working hard to present himself as delivering
continuity - at least to start with," said Sean Callow, senior
currency strategist at Westpac. "Now is not the time to put his own
stamp on policy; that's not why the government selected him."
The upper house of parliament will hold the confirmation hearing for
Ueda on Monday, and that for the two deputies on Tuesday.
The nominations need the approval of both chambers of the Diet,
which are effectively done deals as the ruling coalition holds solid
majorities in both.
Under YCC, the BOJ guides short-term interest rates at -0.1% and the
10-year bond yield around 0% as part of efforts to sustainably
achieve its 2% inflation target.
Facing pressure from rising global interest rates, the BOJ was
forced to raise in December the implicit cap for its 10-year yield
target to 0.5% from 0.25% - a move that fuelled market expectations
of an imminent tweak to YCC.
(Reporting by Leika Kihara; Additional reporting by Tom Westbrook in
Singapore; Editing by Sam Holmes)
[© 2023 Thomson Reuters. All rights
reserved.]
This material may not be published,
broadcast, rewritten or redistributed.
Thompson Reuters is solely responsible for this content.
|