The Bank of Japan will likely adopt a gradual approach to raising interest rates, and won’t be too focused on reducing the side effects of monetary easing, according to a former board member.
(Bloomberg) — The Bank of Japan will likely adopt a gradual approach to raising interest rates, and won’t be too focused on reducing the side effects of monetary easing, according to a former board member.
“A March move is unlikely,” Makoto Sakurai said in an interview with Bloomberg Tuesday. “They will be raising rates only gradually, by carefully assessing the underlying economy and inflation.”
That applies even after BOJ Governor nominee Kazuo Ueda takes the helm of the central bank in April, Sakurai added. There’s little chance of a big policy shift at Ueda’s first policy meeting, he predicted.
Sakurai is known for working closely with Governor Haruhiko Kuroda during his board membership from 2016-2021, and maintains contact with current BOJ officials.
The earliest timing that the new chief may move is around the middle of this year, after confirming a virtuous cycle between wage growth and inflation, Sakurai said. Hideo Hayakawa, a former BOJ executive director, offered a similar view on Bloomberg TV Tuesday, saying he doesn’t expect Ueda to move in a hasty manner.
Market speculation may be rising over potential policy change at the next BOJ meeting ending on March 10. But the most important elements for the central bank’s policy decisions are the economy and inflation, Sakurai said.
The world’s third largest economy grew less than expected last quarter, while the prospect of enough wage growth for sustainable inflation remains uncertain.
The functioning of financial markets isn’t the key factor for the BOJ, especially after the bank adjusted policy in December in order to address it, Sakurai added.
“The BOJ must be aware that speculative trading is at play,” helping create distortions in the bond market, Sakurai said. “So they must be thinking that they will fight against it decisively.”
Japan’s 10-year bond yields breached the BOJ’s ceiling of 0.5% Tuesday. That move underscored expectations the bank may widen the yield band again or scrap it entirely, after it expanded the yield target range in December in a move the BOJ said was a bid to improve the functioning of financial markets.
It’s important to note there are grave concerns among Japanese financial institutions over hiking rates too fast, Sakurai said. Abrupt rate increases would cause valuation losses on bond holdings, after a surge in yields abroad has already dealt a blow to their foreign assets, he said.
Even if the BOJ manages to raise rates, there’s probably a limit, Sakurai said. For 10-year yields, that’s around 1.5%, he indicated.
Otherwise, debt servicing costs for the government will become unbearable, as it could balloon to around ¥35 trillion ($260 billion) from ¥24 trillion today, the ex-board member said.
“If it hits around 1.5%, that would be too much of a burden for debt servicing costs,” Sakurai said.
In a Bloomberg survey conducted after Ueda was nominated to be the head of the BOJ last week, 70% of BOJ watchers expected a tightening step by July. Some flagged the risk of a surprise tweak next month at Kuroda’s final meeting.
Sakurai has known Ueda for decades and has discussed various topics with him, including during occasional lunches at the central bank when Sakurai was a board member. Ueda is an “excellent” choice to succeed Kuroda, given the depth of his understanding of the economy, he said.
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