By Leika Kihara
TOKYO, July 2 (Reuters) – The Bank of Japan should continue to raise interest rates at a moderate pace to rectify excessive yen declines, Toshihiro Nagahama, a government panel member known as an economic aide to dovish Prime Minister Sanae Takaichi, said on Thursday.
Nagahama also said the Takaichi administration pays “very high” attention to bond yield moves and had told the BOJ about investor concerns that its too-rapid balance sheet reduction was making the bond market unstable.
The BOJ, in response, likely decided in June to pause its bond-taper programme from next fiscal year, he added.
“The Takaichi administration puts more emphasis on the quantitative aspect of monetary policy rather than conventional tools like interest rate hikes,” Nagahama told a news briefing hosted by the Foreign Press Center Japan.
The administration regularly holds meetings with bond market participants to gather their views, he said.
On the BOJ’s rate policy, Nagahama said he sees Japan’s nominal neutral rate, or the level that neither cools nor overheats growth, at around 1.5%.
The BOJ should thus raise its policy rate, currently at 1%, two more times at a pace of once every six months, he said.
“Moderate BOJ rate hikes are important in rectifying excessive yen weakness,” Nagahama said, adding that the BOJ’s decision to raise rates in June was an appropriate move.
Delaying BOJ rate hikes could also heighten inflation expectations and push up long-term interest rates, he added.
Hand-picked by Takaichi as one of the private-sector members of the government’s top economic council, Nagahama is considered as being among advocates of loose fiscal and monetary policy.
His comments endorsing moderate BOJ rate hikes underscore the concern the administration and Takaichi’s reflationist aides have about the economic pain inflicted by the yen’s declines.
The BOJ is expected to raise interest rates by year-end and again around summer next year, before pausing for a while, said Nagahama, who is also chief economist at Dai-ichi Life Research Institute.
The central bank raised interest rates to a 31-year high of 1% in June to tame mounting price pressures in a landmark step in its policy normalisation. It also decided to pause from April next year its bond taper programme, which was aimed at scaling back its massive balance sheet.
The rate hike, however, has failed to reverse the yen’s downtrend with the currency hitting a four-decade low on Tuesday, increasing the chance of a yen-buying intervention by the Ministry of Finance.
A fan of former Prime Minister Shinzo Abe’s “Abenomics” reflationist policies, Takaichi has laid out big spending plans that have driven up bond yields due to concerns about the country’s worsening finances.
The administration’s long-term economic blueprint also urged the BOJ to align its decisions with Takaichi’s drive to reflate growth, a sign that political pressure could complicate the central bank’s rate-raising path.
In contrast to Abenomics, which weakened the yen, Takaichi’s “Sanaenomics” economic policy will seek to correct excessive yen declines by boosting Japan’s supply capacity through investment in growth areas, Nagahama said.
(Reporting by Leika Kihara; Editing by Christian Schmollinger and Thomas Derpinghaus)
