BOJ’s Outlook Doesn’t Reflect Reality, Key Price Expert Says

The Bank of Japan should stop trying to keep policy normalization speculation at bay by offering an inflation outlook that doesn’t reflect reality, according to one of the country’s leading experts on prices.

(Bloomberg) — The Bank of Japan should stop trying to keep policy normalization speculation at bay by offering an inflation outlook that doesn’t reflect reality, according to one of the country’s leading experts on prices.

While the central bank sharply raised its price outlook last month, it was still kept too low, said Tsutomu Watanabe, an economics professor at the University of Tokyo. That move was likely due to concerns over fueling speculation that the BOJ will change its negative interest rate, he said in an interview Monday.

“You’re going to deviate hugely from the right course of action if you try to justify policy with projections that aren’t true,” Watanabe said. “The correct path is to explain properly, if you want to prevent the figures from misguiding the policy outlook.”

Watanabe, who was a potential candidate to become BOJ governor earlier this year according to some reports, said that the BOJ’s upgraded July forecast for this fiscal year could have been as high as 2.9%, instead of 2.5%. The bank mostly reflected the stronger momentum up until then, and didn’t adjust its view for the future, he said.

The level of revision that was actually needed in the projection probably would have forced upward shifts for the other two fiscal years through 2025, bringing them above the central bank’s target of 2%, Watanabe said. That would have put the bank in an awkward position, if it wants to keep stimulus unchanged.

“My view is that there is a bias at the BOJ that means it can’t show strong inflation outlook figures,” the inflation expert said. That’s due to the BOJ’s stance that it’s far from changing its negative rate, said Watanabe, who is also a member of a special economic panel for Prime Minister Fumio Kishida.

In the latest Bloomberg survey, private economists saw core inflation rising 2.8% this year, before slowing to below the BOJ’s target level in subsequent years.

The professor spoke days after BOJ chief Kazuo Ueda reiterated the need to continue with monetary stimulus at the annual Jackson Hole symposium, citing underlying inflation that’s still below the bank’s 2% target. Watanabe said he disagrees with Ueda’s price assessment. 

Watanabe has written books with titles such as “The mystery of global inflation,” “What are prices?” and “Japan’s inflation and asset prices: decoding price dynamics.” He has also created his own alternative price index through a company he founded.

The BOJ loosened its grip on yield curve control last month, with Ueda saying the bank must be prepared for upside price risks. While that move was largely welcomed by market participants as a measure that enhances market functioning, Watanabe said the bank should have scrapped it in one go. 

“YCC is nothing but a nuisance now,” Watanabe said. “All the BOJ managed to do was an adjustment. That’s a sore point.”

For the future path of monetary policy, the annual spring wage negotiations that start later this year is extremely important, Watanabe said. It’s likely to decide whether Ueda can raise rates during his five-year term ending in April 2028, he said. 

That’s why it’s vital for the BOJ to provide the right picture of the cost of living, as its view is often referred to during wage talks between labor unions and businesses, Watanabe said.  

The smoothest path for BOJ policy would be for signs of continued robust wage talks to emerge by the end of the year, allowing the bank to ditch YCC, Watanabe said. Then, with more signs of wage increases later on, the BOJ can announce its plan to change the negative rate early next year, Watanabe said.

That timeline is a tad earlier compared to with the views of other BOJ watchers. April is the most popular month for the next policy shift, and most don’t expect any change this year, according to a Bloomberg survey last month. 

“A prerequisite for raising the short-term rate is the end of YCC,” Watanabe said. “I’m almost certain that the BOJ wants to scrap it before a rate hike.”

–With assistance from Brian Fowler.

(Updates with more details on Watanabe)

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