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BOJ Is Nowhere Near Raising Rates, Economic Adviser Says

EconomyJul 12, 2018 08:02
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© Reuters. BOJ Is Nowhere Near Raising Rates, Economic Adviser Says

(Bloomberg) -- The Bank of Japan is a long way from dialing back its aggressive monetary easing, given that inflation remains far from its 2 percent goal, according to Motoshige Itoh, a member of the government’s economic and fiscal policy council.

“Raising interest rates is out of the question,” Itoh, professor at Gakushuin University in Tokyo, said in an interview on Tuesday, adding that a change in policy direction in the near future would risk upending markets. “They have to be very careful about the turning point.”

Inflation has slowed this year after briefly reaching the halfway point toward the BOJ’s price goal, casting renewed doubt on the effectiveness of the central bank’s monetary easing in spurring price growth. The slowdown in inflation has also quietened earlier talk among market watchers of a possible rise in the central bank’s yield target for 10-year Japanese government debt.

Governor Haruhiko Kuroda has repeatedly said the bank will stick persistently with its monetary easing.

‘Be Tenacious’

Itoh, 66, also believes this is no time for backing down on the central bank’s easing measures. The next policy meeting is July 30-31.

“The BOJ can’t move,” Itoh said. “They should be tenacious. There’s no reason why they should give up,” he added, while recognizing the side effects of the easing program on the financial sector.

While prices are struggling to rise now, Itoh sees promising signs in the Japanese economy that offer hope of stronger inflation to come. Companies are investing more and the tight labor market is accelerating the pace of wage gains, he said.

The government also needs to ensure the momentum in the economy is maintained when a planned sales tax increase happens in October 2019, though an extra budget won’t be necessary this time round, Itoh said.

Incentives for people to buy big-ticket items such as houses are among options the government should consider to prop up demand, he said.

A previous 3 percentage point increase in 2014 pushed the economy into recession and coincided with a weakening of inflation that wiped out the central bank’s initial progress in boosting prices.

Itoh says the risk of a tax-induced recession is smaller this time because the increment is only 2 percentage points, to 10 percent, and some items will be excluded.

“The negative impact on demand will be very small this time,” he said.

BOJ Is Nowhere Near Raising Rates, Economic Adviser Says
 

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