Column: Bank of Japan after April 2011, what is the expected response = Daisuke Karakama | Reuters

[Tokyo19th]–The Bank of Japan decided to maintain the status quo of monetary policy at the monetary policy decision meeting on the 18th. Following the Reuters English report on January 14, the possibility of canceling the negative interest rate (that is, raising the interest rate) before the consumer price index (CPI) reached a year-on-year increase of 2% was raised, but for the time being It seems to end with a transient commotion.

Observations will continue to be mixed over the normalization of the Bank of Japan. Considering that the current system will end on April 8, 2023, and the personnel of the new system will be distributed by the Fumio Kishida administration, which seems to be far from the Abenomics route, the previous route will be gradually but surely changed. It may be done. A column by Daisuke Karakama. The photo was taken at the Bank of Japan Head Office in Tokyo in September 2016 (2022 Reuters / Toru Hanai)

The CPI outlook (core base) in the notable outlook report was 0.2 percentage points from 0.9% to 1.1% in 2022, and 1.0% to 1.1% in 2023. Has been raised by 0.1 percentage points. In short, it is a construction that “there is no acceleration of inflation from 2022 to 2023”, and it is an arrangement that it will be settled by a temporary rise in the wake of the depreciation of the yen and the rise of resources.

Although the risk assessment of the price outlook has been raised to neutrality for the first time since October 2014, saying that it is “generally balanced up and down”, as the outlook for the core CPI does not grow, it is up to discussions to end monetary easing. And difficult.

However, even if the Reuters report is dismissed, observations will continue to be mixed over the normalization of the Bank of Japan. Considering that the current system will end on April 8, 2023, and the personnel of the new system will be distributed by the Fumio Kishida administration, which seems to be far from the Abenomics route, the previous route will be gradually but surely changed. It may be done.

It is no wonder that the leveling work will begin little by little during 2022, as the start of a stepped normalization process in April 2023 could disrupt the market. As was reminded by the Reuters report, it is possible to raise interest rates while insisting on a mitigation route under the current framework. It is possible to claim that “it is a rate hike, but it is actually a easing.”

As shown in this statement, the Bank of Japan said, “We aim to achieve the” price stability target “of 2%, and until the point necessary to maintain this stably,” quantitative with long- and short-term interest rate manipulation.・ Continue qualitative monetary easing ”. Regarding the monetary base, we will continue our expansion policy until the actual year-on-year rate of increase in CPI (excluding fresh food) stably exceeds 2%.”

Although the monetary base is planned to be expanded, it does not promise a stable low policy interest rate, let alone a negative interest rate. Yield curve control (YCC) is a framework that secures the mitigation effect by lowering the actual yield curve with respect to the equilibrium yield curve estimated by the Bank of Japan.

If the economic and financial situation changes, the equilibrium yield curve will naturally move up and down. Therefore, it is assumed that the actual yield curve will move up and down in order to secure the same easing effect as before, and whether the result is a negative interest rate or a positive interest rate is also a “secondary” story.

Of course, the statement said, “For the time being, we will keep an eye on the effects of the new coronavirus infection and, if necessary, take additional monetary easing measures without hesitation. Regarding the policy interest rate, it is assumed that the current long- and short-term interest rates will remain at or below the current level. ”Therefore, there is also the idea that interest rates cannot be raised.

However, with many criticisms that the government’s response to the Omicron variant is excessive, it is unreasonable to dispel interest rate hikes in the market with this wording alone.

<"Bad yen depreciation" theory and normalization>

Of course, it is understandable that there are deep-rooted concerns about the appreciation of the yen due to past trauma. However, now that the trade surplus has disappeared and the domestic and foreign disparities in economic and financial conditions have widened significantly, the room for yen appreciation is limited. In the first place, considering the atmosphere that the “bad yen depreciation” is likely to become a social problem in the midst of high resource prices, there is also the idea that a slight appreciation of the yen is acceptable to the Japanese economy. On the contrary, there is rationality in the opinion that the depreciation of the yen may be unacceptable.

If the depreciation of the yen is to be corrected, it is usually the usual way to raise interest rates. “We are concerned about the depreciation of the currency while leaving the negative interest rate unattended” is an attitude that is too contradictory.

Of course, the BOJ’s move alone will not change the tide of floating exchange rates. However, if you really want to deter the depreciation of the currency, it should be recognized that the BOJ’s step of canceling the negative interest rate will naturally come into play.

“We are not thinking about raising interest rates or changing the current accommodative monetary policy, and we are not discussing it,” Kuroda dismissed. However, when it comes to negative interest rates, it is dangerous to take it at face value because the possibility was denied by the Diet’s response until just before it was introduced in January 2016.

If the Bank of Japan considers some kind of normalization at some point, the current situation where the US Federal Reserve (FRB) is extremely hawkish is considered to be the optimal environment, but it is already overkill. Concerns about killing are also beginning to drift. If so, it seems reasonable to slowly explore the discussion of the normalization process by taking the opportunity of a thousand times this year.

It is quick to consider a specific procedure, but the first move is not to raise interest rates suddenly, but to shorten the operation target period in YCC, which has always been rumored and disappeared (long-term target changed from 10 years to 5 years) Work to raise the yield curve through is expected.

It is easy for any central bank to raise the interest rate on the Hanamichi in line with the resignation of the president, but in the case of the Bank of Japan, the negative interest rate cancellation (rate hike) may be used as the flag of the new system rather than the theory of raising the interest rate on the Hanamichi.

As mentioned above, in the framework of YCC, the revision of the interest rate level itself does not correspond to the revision of the easing stance. Given that there have been criticisms that the negative interest rate policy is too low a policy interest rate (reversal rate) that damages the economic and financial situation, both the shortening of the operation target period and the cancellation of the negative interest rate are “rather added”. It’s mitigation. “

In fact, it is no wonder that the negative interest rate is fundamentally withdrawn because it is taking measures to mitigate the harmful effects of the negative interest rate, such as the special checking deposit system. In any case, it seems that the discussion on normalization with an eye on the post-Kuroda system will not proceed quickly, but it seems better to imagine brain teaser as well.

Edited by: Kazuhiko Tamaki

(This column was posted on the Reuters Forex Forum. It is based on my personal opinion.)

* Daisuke Karakama is the chief market economist at Mizuho Bank. After graduating from Keio University Faculty of Economics in 2004, joined the Japan External Trade Organization (JETRO). Seconded to the Japan Center for Economic Research from 2006 and to the Office for Economic Affairs and Finance (Belgium) of the European Commission from 2007. Mizuho Corporate Bank (currently Mizuho Bank) since October 2008. When he was seconded to the European Commission, he was the only Japanese economist involved in creating the EU economic outlook. His books include “European Risk: Japaneseization, Yenization, and Bank of Japan” (Toyo Keizai, July 2014), “ECB European Central Bank: From Organization, Strategy to Banking Supervision” (Toyo Keizai, November 2017) Month). Many media appearances such as newspapers and TV.

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