BOJ’s Adachi says if excessive yen falls impact inflation, policy response becomes option

Bank of Japan board member Seiji Adachi

• Changing monetary policy frequently to stablise fx moves would lead
  to big changes in rate moves
• If interest rate
  moves are too big, that would cause disruptions in household and
  corporate investment
• Responding to
  short-term fx moves with monetary policy would affect price stability
• If excessive yen
  falls are prolonged and expected to affect achievement of our price
  target, responding with monetary policy becomes an option
• It is possible to
  consider responding with monetary policy if fx moves cause big
  changes in inflation expectations
• Japan’s economy is
  recovering moderately, although there are some weak signs
• Consumption holding
  steady as a whole mainly for service spending
• Japan’s economy not
  slumping but not in strong shape either with various uncertainties
  remaining
• BOJ must maintain
  accommodative financial conditions until price goal achieved

• We are not yet at stage where we are convinced that there is
  sustained achievement of price target, so must maintain accommodative
  conditions
• We must absolutely
  avoid raising interest rates prematurely
• If we focus too much
  on downside risks, inflation may accelerate and might force us to
  tighten monetary rapidly as a result

• By fixing interest rates at current zero levels until inflation is
  durably at our price target, we might be forced to hike rates rapidly
  later and therefore risk hurting economy
• We must look not
  just at downside but upside risks in guiding monetary policy
• Important to adjust
  degree of monetary support in several stages, as long as underlying
  inflation continues to head toward 2%

• Desirable to reduce BOJ’s bond buying in several stages, taking into
  account bond market supply and demand, function, liquidity
• Reducing BOJ’s JGB
  bond buying at a sharp pace could cause damage to economy
• Consumer inflation
  slowing now but likely to re-accelerate from summer through autumn
  this year
• If yen declines
  accelerate or become prolonged, inflation could re-accelerate faster
  than expected and may require boj to quicken interest rate hike

I don’t want to say Adachi sounds hawkish, no one at the BOJ is hawkish, but he is sounding quite forthright with reasons to keep on tightening, albeit at a slow measured pace.

more to come

This article was written by Eamonn Sheridan at www.forexlive.com.