Former Bank of Japan board member Kenzo Yamamoto has suggested that the central bank's next interest rate increase could occur sooner than many market participants anticipate, as it works to normalize what remains an excessively accommodative financial environment.
Yamamoto stated on Monday that the Bank of Japan is in a situation that necessitates prompt action. When asked if the central bank would raise rates again in December, as predicted by a majority of economists in a recent survey, he indicated that, given the current degree of monetary easing, the next hike could materialize prior to that timeline.
The Bank of Japan raised its benchmark interest rate to 1% earlier this month, marking the highest level since 1995. Yamamoto, who served until 2012, highlighted that the average underlying inflation measure, which excludes fresh food and special factors like government subsidies, has been around 3% over the past four years. This figure is significantly above the central bank's stated 2% target.
However, the core inflation gauge that only excludes fresh food remained steady at 1.4% in May, partly due to government subsidies curbing energy costs. The Bank of Japan has recently noted that the underlying trend of price increases remains slightly below the 2% target.
Yamamoto expressed concern that the central bank might not adequately consider the potential inflation metrics as reflective of the true price trend. He emphasized that the Bank of Japan needs to shift its policy focus more decisively toward controlling inflation.
Yamamoto, who formerly headed the BOJ's financial systems department, also voiced confusion over the bond purchase plan announced by the central bank at its June policy meeting. The bank decided to maintain its monthly bond purchases at approximately 2 trillion yen from fiscal 2027 onward, halting the previously planned reduction in its buying scale.
He pointed out that while the appropriate size of the Bank of Japan's bond holdings is unclear, it is evident that the current level is far from a normalized state. He argued that there was no necessity to cease the reduction of bond purchases so prematurely, warning that the announced plan risks flooding financial markets with excessive liquidity.
Yamamoto cautioned that, given the Japanese government's historical support for loose policy, the Bank of Japan could face political pressure to increase bond purchases again if it lacks a clear roadmap for normalizing its balance sheet. He also identified another risk: the central bank might eventually be forced to raise interest rates more aggressively than necessary if the financial conditions remain overly loose for an extended period.
He characterized the Bank of Japan's bond program as effectively declaring that its balance sheet will never return to the size it was before the era of ultra-loose monetary policy.
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