BOJ’s Adachi says if excessive yen falls impact inflation, policy response becomes option

Bank of Japan board member Seiji Adachi

  • Changing monetary policy frequently to stablise fx moves would lead
    to big changes in rate moves
  • If interest rate
    moves are too big, that would cause disruptions in household and
    corporate investment
  • Responding to
    short-term fx moves with monetary policy would affect price stability
  • If excessive yen
    falls are prolonged and expected to affect achievement of our price
    target, responding with monetary policy becomes an option
  • It is possible to
    consider responding with monetary policy if fx moves cause big
    changes in inflation expectations
  • Japan’s economy is
    recovering moderately, although there are some weak signs
  • Consumption holding
    steady as a whole mainly for service spending
  • Japan’s economy not
    slumping but not in strong shape either with various uncertainties
  • BOJ must maintain
    accommodative financial conditions until price goal achieved
  • We are not yet at stage where we are convinced that there is
    sustained achievement of price target, so must maintain accommodative
  • We must absolutely
    avoid raising interest rates prematurely
  • If we focus too much
    on downside risks, inflation may accelerate and might force us to
    tighten monetary rapidly as a result
  • By fixing interest rates at current zero levels until inflation is
    durably at our price target, we might be forced to hike rates rapidly
    later and therefore risk hurting economy
  • We must look not
    just at downside but upside risks in guiding monetary policy
  • Important to adjust
    degree of monetary support in several stages, as long as underlying
    inflation continues to head toward 2%
  • Desirable to reduce BOJ’s bond buying in several stages, taking into
    account bond market supply and demand, function, liquidity
  • Reducing BOJ’s JGB bond buying at a sharp pace could cause damage to economy
  • Consumer inflation
    slowing now but likely to re-accelerate from summer through autumn
    this year
  • If yen declines
    accelerate or become prolonged, inflation could re-accelerate faster
    than expected and may require boj to quicken interest rate hike

I don’t want to say Adachi sounds hawkish, no one at the BOJ is hawkish, but he is sounding quite forthright with reasons to keep on tightening, albeit at a slow measured pace.

more to come

This article was written by Eamonn Sheridan at Source