Article Highlights

  • Japan still needs powerful monetary support
  • Adds Japan short-term real rates higher than U.S.
  • BOJ must maintain 2 percent inflation target - Iwata
  • Risks to inflation outlook skewed to downside
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Bank of Japan Deputy Governor Kikuo Iwata on Thursday dismissed the need to raise interest rates anytime soon, stressing that the economy still needs support from “powerful” monetary easing with inflation distant from the central bank’s 2 percent target.

Japan’s low inflation expectations mean its short-term real interest rate, which is calculated by subtracting inflation expectations from nominal interest rates, remains higher than that of the United States, Iwata said.

The BOJ must, therefore, maintain its massive stimulus program, even if global long-term interest rates rise on expectations of stronger world economic growth and steady interest rate hikes by the U.S. Federal Reserve, he said.

“Japan is still distant from achieving the BOJ’s inflation target and needs support from monetary easing,” Iwata said in a speech to business leaders in Aomori, northern Japan.

“There is absolutely no need to raise interest rates and diminish the degree of monetary easing, which is not that big compared with that of the United States,” he said.

Iwata also countered the view the BOJ should abandon its 2 percent inflation target, saying the goal was crucial in heightening inflation expectations and ensuring real interest rates remain low to fend off any adverse shocks to the economy.

“Many major economies, including Japan, set their inflation targets around 2 percent because of a commonly shared view that it’s important to anchor inflation expectations at 2 percent and secure sufficient room to reduce real interest rates,” he said.

Risks to Downside

After three years of heavy asset buying failed to drive up inflation, the BOJ revamped its policy focus last year to one capping long-term interest rates from that targeting the pace of money printing.

Core consumer prices rose just 0.3 percent in April from a year earlier, well below the BOJ’s target, as companies remain wary of raising prices for fear of scaring away cost-sensitive households.

But growing signs of life in Japan’s economy have presented the BOJ with a fresh communications challenge, pushing it to be clearer with markets on how it might dial back its stimulus – even though such action remains a long way off.

Japan’s economy expanded at an annualized rate of 1.0 percent in the first quarter on robust exports and a boost from private consumption, prompting the BOJ to upgrade its economic assessment in April.

Iwata said Japan’s economy was shifting toward a moderate expansion, but warned that record corporate profits and a tightening job market have yet to drive up inflation.

“Risks to the outlook are skewed to the downside” on uncertainty over overseas economic developments and whether long-term inflation expectations will heighten, he said.

Some analysts believe the BOJ could be forced to raise its yield target if pressure from rising global bond yields makes it hard to cap Japanese long-term interest rates.

An architect of the BOJ’s huge asset-buying program, Iwata has been among those on the nine-member board who place more emphasis on the boost the bank’s massive money printing could have on the economy and inflation expectations. (Reporting by Leika Kihara; Editing by Chris Gallagher & Shri Navaratnam)