By Noriyuki Suzuki,
The Bank of Japan is far from raising interest rates as tightening monetary policy prematurely will put its goal of attaining 2 percent stable inflation at greater risk, Deputy Governor Shinichi Uchida said.
Uchida pointed to budding signs that Japanese companies are changing their stance on price and wage hikes. But he said in a recent interview with Kyodo News that uncertainty is still high over the inflation outlook as he stressed the need to persist with monetary easing to support the economy.
The BOJ has denied market speculation of a policy change when the rise in the country's inflation rate has stayed above 2 percent. The central bank's dovish stance, in contrast with its U.S. and European peers, is behind the yen's recent declines relative to the U.S. dollar and euro.
Uchida said "rapid and one-sided" yen weakening is not desirable and the BOJ will coordinate closely with the government, adding to recent warnings by Japanese authorities about the currency's precipitous moves that have kept the market wary of potential intervention.
"We are far from a situation in which we need to raise interest rates hastily. The risk of tightening monetary policy prematurely and missing the chance to achieve 2 percent inflation is far greater," Uchida said in his first interview with a media organization since he became deputy chief in March.
"Signs are finally emerging that companies are changing their behavior that had been in place since Japan was in deflation. It's important to nurture such buds of change with care," he said.
He maintained that higher import prices have been driving recent inflation in Japan and such cost-push factors will dissipate in the coming months. Still, rising prices are putting a "burden" on households, and a "balanced" policy approach is needed, the deputy governor said.
The BOJ has stressed the need for robust wage growth to attain stable inflation. After wage negotiations between labor unions and management this year, the country saw its best pay hikes in about three decades, with an average increase of 3.58 percent, a tally released Wednesday by the Japanese Trade Union Confederation known as Rengo showed.
But the output gap, another key indicator to see the inflation outlook, remained negative in the January-March quarter, according to the BOJ's data. A positive output gap often leads to higher inflation.
"Uncertainty is high over the inflation outlook, including the impact of price-setting behavior and wage hikes by companies. We have not reached a point where we can foresee the 2 percent price stability target can be attained stably and sustainably," Uchida said.
The BOJ is scheduled to update its economic growth and inflation forecasts in late July when it holds a two-day policy-setting meeting.
The rise in the core consumer price index excluding volatile fresh food items has stayed above 2 percent for more than a year. But the index is currently forecast to rise 1.8 percent in fiscal 2023 from a year earlier, with many analysts expecting an upward revision to the outlook.
"There is no doubt that it (the more than 2 percent rise in the core CPI) has put a burden on households," Uchida said. "Under such circumstances, we believe it is important to support the economy with the current monetary easing so that inflation will be stable at 2 percent, accompanied by wage growth."
Financial markets have speculated that the BOJ will modify or scrap its yield curve control program, under which short-term interest rates are set at minus 0.1 percent while 10-year Japanese government bonds are guided to around zero percent. The central bank raised the 10-year yield cap to 0.5 percent in a surprise move in December to rectify market distortions.
After the previous policy meeting in June, Kazuo Ueda, the BOJ's chief, said it would be inevitable for a change to the yield cap program to come as a surprise. One board member said at that meeting that the central bank should start considering how to "treat" the program at an early stage.
"Enabling financial markets to price in a specific policy change in advance is difficult under the yield curve control. But we have been ensuring financial market stability through controlling interest rates directly," Uchida said.
"Considering the characteristics of yield curve control, we will ensure appropriate communication and financial market stability within that framework," he said.
Asked about the yen's weakness, Uchida said the BOJ will closely monitor its impact on the economy and prices. The yen has briefly fell beyond the psychologically important line of 145 to the dollar last week as financial markets expect more rate hikes by the U.S. Federal Reserve and the European Central Bank.
"The yen's rapid and one-sided depreciation raises uncertainty over the outlook, which is not desirable. It's important that foreign exchange rates move stably, reflecting economic and financial fundamentals," Uchida said.
"The BOJ will coordinate with the government, and closely monitor developments in the foreign exchange market and their impact on the economy and prices," he added.
