Tokyo, May 19, 2010 (FBC) Bank of Japan Governor Kazuo Ueda said the central bank would be unwavering in its patience with ultra-loose monetary policy, calming markets and saying Japan would be far better off as its global peers battled with too much rigidity. Inflation.
Yuda said Japan’s recent rise above the BOJ’s 2% target was largely driven by inflation rather than strong domestic demand, adding that a tighter monetary policy response to such price increases would hurt the economy.
Ueda said on Friday that there is also a risk of underestimating expectations due to the sharp decline in US interest rates.
“It is important to continue monetary easing right now” because Japan has yet to see the conditions for inflation to hit 2 percent sustainably, he told a seminar.
While this year’s domestic wage negotiations have resulted in wage increases not seen in three decades, the BOJ must wait and see whether such wage increases will spread to more companies and be sustainable, he said.
“The cost of prematurely changing policy and bringing the bud to 2% inflation is enormous,” Yuda said. “It’s worth taking the time[when]to review the ultra-simplistic policy for future exits.”
Yuda gave few hints about how quickly the BOJ will consider policy adjustments.
“The time may arrive earlier or later than expected”, depending on economic uncertainties, when asked about the possibility of inflation hitting 2% permanently at the end of this year.
No change to 2% target.
The comments came after data showed Japan’s core consumer price inflation hit 3.4% in April, above the BOJ’s 2% target, as food and service prices rose.
The dovish tone may dampen market expectations that the U.S. will soon start winding down previous stimulus to offset the growing side effects of long-term easing, such as the distortions in market prices caused by massive bond purchases.
Instead of focusing only on side effects, the BOJ should carefully weigh the balance between the benefits and costs of its policy decisions, Yuda said.
A Reuters poll conducted April 12-19 showed that more than half of economists predicted the BOJ’s control of the yield curve would end by the end of the year.
In his first speech since taking the helm in April, Ueda said he would strive to “make rational decisions and provide as clear an explanation as possible” to increase the impact of monetary policy on market and public behavior.
He added that the BOJ’s planned year-long policy review aims to analyze the effects and costs of various measures it has taken to combat deflation.
But the review is not considered to revise the BOJ’s 2% inflation target, he said.
“I don’t see the need to review the rate target,” Yuda said, challenging the view offered by some scholars that the BOJ would lower the target and give itself more flexibility to raise interest rates from lower levels.
Under yield curve control (YCC), the BOJ sets a target of -0.1% to sustainably hit its 2% inflation target and sets the 10-year bond yield at 0%. It buys large amounts of government bonds and risky assets to pump into the economy.
Reporting by Lika Kihara; Editing by Toby Chopra
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