© Bloomberg. Haruhiko Kuroda
(Bloomberg) — The Bank of Japan needs to extend its pledge to keep extremely low rates and there’s a good chance it will tweak the time frame as soon as the July meeting, ahead of an expected Federal Reserve rate cut, according to a former central bank official.
“The BOJ is now putting weight on the importance of sending a strong message that it will firmly continue with monetary easing,” Kazuo Momma, a former executive director at the BOJ, said in an interview Tuesday.
For a central bank low on ammunition, changing the wording of its forward guidance on policy was a low-cost option to convey that message, he added, ruling out further easing moves in July. The BOJ clarified its guidance in April to commit to extremely low rates until at least around spring 2020 while it monitors the economic impact of a sales tax hike scheduled for October.
Traders Are Certain Fed Will Cut in July, But Unsure What’s Next
Governor Haruhiko Kuroda and his board will conclude a two-day policy meeting on July 30, the day before the Fed is expected to cut rates for the first time since 2008. While some analysts have flagged the risk of the yen rising sharply in response to a U.S. rate cut, Momma said a jump in the currency was unlikely given markets have already priced in a reduction.
Instead, the BOJ would want to extend its guidance to avoid market speculation about its commitment to keep rates low and there’s a good chance of this either in July or October, he said. If the bank waits until October to make the change, only about half a year will remain on the current promise to maintain low rates, so there is the “simple idea” of getting on with the change this month, Momma said.
“The length of the extension will depend on the BOJ’s economic outlook,” said Momma, who led the crafting of the bank’s monetary policy for several years during more than three decades at the BOJ. “It will aggressively extend the guidance if it’s clear the global economy won’t pick up within six months,” he added.
The BOJ currently sees the economy recovering in the second half of this year.
An increasing number of BOJ watchers are forecasting the next policy step will be additional stimulus as the Fed cuts rates in light of global uncertainties, including the U.S.-China trade war. Six of 50 economists surveyed in June expected the BOJ to ramp up its easing this month.
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