By Leika Kihara
TOKYO, Feb 13 (Reuters) – Japan is “very close” to durably achieving the central bank’s 2% inflation target, hawkish board member Naoki Tamura said on Friday, signaling the chance of an interest rate hike in coming months.
Tamura also said current interest rates remain “considerably distant” from levels deemed neutral for the economy, suggesting that several more rate hikes could be foreseen before monetary policy begins to constrain growth.
“The underlying inflation rate has been gradually increasing and is very close to becoming embedded at 2%,” Tamura said in a speech.
“It’s quite possible that by this spring, our 2% inflation target can be judged to have been achieved,” he said, underscoring his preference for a near-term interest rate hike.
The remarks heighten the chance that Tamura will join another hawkish board member Hajime Takata, who unsuccessfully pushed for a rate hike in January, in calling for an increase in the BOJ’s policy rate at upcoming meetings in March or April.
The BOJ raised its policy rate to a 30-year high of 0.75% in January. The central bank has signaled its readiness to keep pushing up borrowing costs if the underlying inflation rate, or price growth driven by domestic demand, makes progress in durably hitting its 2% target.
With the weak yen heightening inflationary pressure, markets have priced in roughly an 80% chance of a rate hike by April.
Tamura said inflation was becoming “endogenous and sticky”, with its main driver shifting from high raw material prices to rising labour costs reflecting a tight job market.
Japan’s output gap is already in positive territory with a lack of supply capacity putting upward pressure on prices, which is making firms more keen to pass on costs, he said.
With the impact of past rate hikes on the economy “extremely limited,” the BOJ must pay attention to problems caused by prolonged monetary easing such as excessive yen declines, high inflation and rising property prices, Tamura said.
“I personally do not think Japan is achieving price stability” with many households and companies suffering from the rising cost of living and high input prices, he said.
While the BOJ must avoid premature monetary tightening, it also needs to prevent Japan from experiencing persistent inflation that cannot be described as moderate, he said.
A former commercial bank executive, Tamura is seen as among the hawkish members of the board. He was one of the two members who unsuccessfully proposed raising rates to 0.75% in October.
Tamura repeated his view that Japan’s neutral rate, or the level that neither overheats nor cools growth, was at least around 1%, though he noted that the estimates vary widely depending on the methodology used.
“Therefore, in my view, the only way to determine where the level of the neutral interest rate … is to examine the response of economic activity and prices as the BOJ hikes rates,” he said.
Central banks use the neutral interest rate as a benchmark in setting monetary policy. But it is not directly observable and hard to estimate as factors affecting it, like productivity, change over time.
The BOJ has produced estimates suggesting Japan’s nominal neutral rate lies somewhere in a range of 1% to 2.5%.
(Reporting by Leika Kihara; Editing by Christopher Cushing, Muralikumar Anantharaman and Kim Coghill)
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