BOJ's Nakahara warns against deflation revival
yahoo.reuters.com
Thu Mar 23, 2006 5:22 AM ET
(Releads, adds LDP lawmakers' comments)
By Yoko Nishikawa
TOYAMA, Japan, March 23 (Reuters) - The Bank of Japan is unlikely to need to tighten credit soon and should instead watch for renewed deflation, a member of its board said on Thursday in the most dovish call yet from within the central bank.
Shin Nakahara said the BOJ should have waited to confirm that years of falling prices had ended before it scrapped its ultra-easy monetary policy on March 9, distancing himself from the rest of the Bank of Japan's nine-person board.
"Consumer prices have turned positive on a year-on-year basis but the rises until December were extremely small, and rather than making a decision on the rise in January alone, we needed to take more time in evaluating whether prices were completely in an uptrend," Nakahara said.
The remarks underscored the view that Nakahara was the sole dissenter in the BOJ's decision to end its five-year-old policy and that he would likely oppose rises in the near future in short-term interest rates from present levels near zero, although his term expires in June.
"There's little chance that prices will rise enough to lead to any policy action in the immediate future," Nakahara told a news conference after meeting business leaders in Toyama, central Japan.
He said a desirable rate of inflation was about 1-2 percent -- compared with an annual core consumer price inflation rate of 0.5 percent in January and 0.1 percent in the preceding two months, which followed seven years of near non-stop decline.
The BOJ board has defined stable prices as an inflation rate of 0 to 2 percent, but Nakahara said that did not necessarily mean the BOJ would not raise rates until annual CPI inflation rose to 1 or 2 percent.
Some lawmakers in the ruling Liberal Democratic Party (LDP) are calling for a more clear-cut inflation target.
"To stabilise market expectations after the end of quantitative easing and to improve transparency in policy, there is a need to set a numerical target range for desirable stability in prices," a report by an LDP committee said on Thursday.
LDP policy chief Hidenao Nakagawa warned against an early tightening.
"What would happen if there is an early credit tightening?" he said in a speech in Tokyo. Such a move could drag the economy "back into the darkness of deflation", he said.
The BOJ's Nakahara, however, distanced himself from such calls. "Unnecessary comments from outside (the BOJ) can distort calm discussion on monetary policy, and market expectations and the formation of prices can be unhinged," he said.
UPSIDE DOWN
Taking a cue from Nakahara's comments, benchmark 10-year Japanese government bonds recouped some of their recent losses, their yield pulling back to 1.715 percent from Wednesday's 19-month high of 1.740 percent <JP02770067=JBTC>.
Although BOJ Governor Toshihiko Fukui has said short-term interest rates will stay near zero for a while, he has declined to say for exactly how long, keeping the bond market jittery.
BOJ board member Atsushi Mizuno, on the hawkish end of the spectrum, has even suggested the central bank should raise rates early so it can cut them when the economy slows -- an idea Nakahara criticised on Thursday.
"I can understand where the idea is coming from, from a practical standpoint, but I think it is basically an upside-down argument," he said.
Nakahara declined to say explicitly that he was the dissenter in the 7-1 vote to end quantitative easing, a framework introduced in 2001 to avert a financial crisis and stem deflation by flooding the banking system with excess funds.
Analysts said there was little doubt he was the odd man out and were sceptical how much weight his opinion would carry within the BOJ board.
"It's obvious from the speech that he was the one who dissented from the decision to shift policy, so anything he says is going to be seen as a minority view," said Kiichi Murashima, director of economic and market analysis at Nikko Citigroup.
Nakahara said it was too early to discuss when short-term rates should be raised to "neutral" levels or to say where those levels might be.
The benchmark overnight call rate has been trading around 0.002 percent lately, up from 0.001 percent prior to the BOJ policy shift but still rock bottom by most measures.
Despite his cautious outlook on policy, Nakahara forecast a steady economic recovery.
"I think we can be confident about the sustainability of economic expansion in the future," he said, although he cited several risks including growing uncertainty over the U.S. and Chinese economies and on oil prices. (Additional reporting by Ritsuko Ando, Tamawa Kadoya, Chisa Fujioka and Shinichi Kishima) |
