TOKYO -- Although a growing number of economists expect it to raise its long-term interest rate target, the Bank of Japan is in no mood to tighten at a time when inflation remains worryingly sluggish.
Amid such speculation, moves by the central bank to counter upward pressure on interest rates could widen the spread with overseas rates, driving a weaker yen.
BOJ officials report an uptick in inquiries from abroad about the prospects of tapering off the Japanese monetary stimulus. Comments by Mario Draghi, the European Central Bank president, late last month fueled speculation that the ECB was moving toward the exit. "Deflationary forces have been replaced by reflationary ones," Draghi told a conference on June 27.
But overseas BOJ watchers are not the only ones wondering whether the Japanese central bank is ready to unwind. About 41% of economists recently surveyed by the Japan Center for Economic Research expect the bank to raise its long-term interest rate target by the end of next year. Since last September, it has been trying to hold the 10-year government bond yield at around zero.
Such speculation, should it intensify, could trouble the BOJ in a number of ways. Increasing upward pressure on the 10-year yield would make it harder to keep long rates low and stable. After the yield hit a roughly 18-week high of 0.1% last week, the bank responded with an unlimited buy offer at a fixed price -- a big gun it has rarely deployed.
Anticipation of an early rate hike could also throw a wet blanket on inflation expectations, which Gov. Haruhiko Kuroda and company are trying to kindle, and contribute to a stronger yen. The latter would also work against the BOJ leadership's reflation agenda.
Consumer price growth in Tokyo proper, excluding fresh foods, was unchanged on the year in mid-June -- a reading that Yoshiki Shinke at the Dai-ichi Life Research Institute said "reconfirmed the weakness of the underlying trend in inflation." BOJ policymakers want to avoid any situation that puts depresses already feeble price growth.
If faced with sharply rising long-term interest rates, the BOJ probably would resort to another unlimited-buying operation or similar measures to drive home its desire for low, stable rates. Kuroda is expected to reiterate the bank's commitment to monetary easing at a news conference scheduled for July 20.
Under its current framework, the BOJ has committed itself to keep expanding the monetary base until inflation "exceeds the price stability target of 2 percent and stays above the target in a stable manner." This promise to overshoot is meant to stoke inflation expectations, and Kuroda is expected to double down on it at the news conference.
The policy board is moving to lower its inflation forecasts at next week's meeting, although policymakers are unlikely to deploy additional easing, judging that the factors driving inflation upward remain intact. But the downgrades themselves will help send the message that the BOJ intends to maintain its accommodative stance for the long haul.