(Bloomberg) -- The Bank of Japan should raise its benchmark interest rate early, and it faces the risk it has already fallen behind the curve, according to a prominent economics professor who was an adviser to the prime minister.
“The BOJ had better move early while it can,” said Hiroshi Yoshikawa, professor emeritus at the University of Tokyo. In a sense, “they may already be behind the curve,” he said in an interview Monday.
Yoshikawa, who has been a close friend to BOJ Governor Kazuo Ueda for almost six decades, spoke amid intense market focus on whether a rate hike will happen next week or next month.
Expectations for a December hike has cooled after the central bank took an unusual scheduling move Monday afternoon, but Yoshikawa’s comments point to factors that the BOJ could still use as reasons for raising the lowest rate among developed nations next Thursday.
“At 0.25%, Japan’s rate is exceptionally low,” Yoshikawa said, speaking right before the BOJ set up a speech by Deputy Governor Ryozo Himino in January. “Unless there is a major shift in the economy, it’s natural to lift the rate. It’s not hawkish. It’s reasonable.”
Japan’s inflation has been running more or less at the same level in the US and Europe this year. Given that reality Japan’s borrowing costs are too low, Yoshikawa said, although he added the rate doesn’t have to be quite as high as in those economies. Japan’s nominal neutral rate is probably around 1%, he said.
Yoshikawa, who is also a member of a committee that determines Japan’s economic cycle, said that the BOJ may face an economic downturn or even crisis in the course of normalization. Japan’s current expansionary period started in May 2020 and is already longer than most growth periods in the postwar era.
“There’s a non-negligible chance that the BOJ will be forced to cut rates down the road,” Yoshikawa said. “If the rate is at 0.25%, it can only go down to 0%. So it’s the right thing to do to raise it when you can.”
In an interview with local media last month, Ueda made a similar point that it’s better to be able to lower the rate when faced with a recession, as unconventional policy measures can’t be a complete substitute for standard rate policy.
Traders see about a 28% chance for a BOJ rate hike this month, down from around 66% at the end of last month. Citigroup shifted its rate move forecast to January from December on Monday, saying there isn’t much reason for the BOJ to rush.
On Monday the BOJ also took the unusual step of scheduling a speech and press conference by Deputy Governor Himino in January, before its policy decision. That theoretically gives the central bank an opportunity to communicate more with markets right before potentially hiking rates. The yen has weakened against the dollar since the announcement.
Japan’s data so far have shown that the economy has performed in line with the BOJ’s projections. Economic growth for the third quarter was revised up according to the cabinet office report released Monday, while the BOJ’s key inflation gauge has stayed at or above its 2% price target for more than two and a half years.
“The BOJ is basically saying that there isn’t enough inflation yet,” Yoshikawa said. “I don’t know if anyone else thinks that way among the Japanese public.”
Yoshikawa, who is also a counselor for the BOJ, stressed that he has no inside information and his views are his own. After getting to know each other in high school, Yoshikawa and Ueda both went to the University of Tokyo and eventually became professors there. Yoshikawa earned his doctorate in economics at Yale University, and was advised by nobel laureate James Tobin.
“The BOJ seems a little too cautious,” Yoshikawa said. “The most important thing about monetary policy is nimbleness. If the economic situation changes after rate hikes, you can just lower it. You shouldn’t see that as a failure.”
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