By Leika Kihara
TOKYO (Reuters) – Bank of Japan Deputy Governor Ryozo Himino said the central bank must be “very vigilant” about the impact the yen’s moves could have on the economy, suggesting that weakness in the currency will be one of the factors that will influence the timing of the next interest rate. walking tour.
However, he said it is inappropriate for central banks to focus directly on exchange rates when setting monetary policy, as other factors should also be taken into account.
“Exchange rate fluctuations affect economic activity in several ways. It also affects inflation in a broad and lasting way, apart from the direct impact on import prices,” Himino said on Tuesday.
“Therefore, we obviously have to be very vigilant and analyze very carefully the impact of exchange rate volatility on the economy, prices and their prospects,” he said in a panel session organized by Columbia University in Tokyo.
However, the BOJ should not automatically react to exchange rate movements when setting interest rates as there are “other aspects” to take into account, such as the economic and price outlook, he added.
A weak yen has become a headache for Prime Minister Fumio Kishida’s government, which has seen its approval ratings fall as the currency’s decline raised the cost of living for households by driving up the price of importing food and fuel .
BoJ Governor Kazuo Ueda has ruled out using monetary policy to directly influence exchange rate movements, but signaled the likelihood of a rate hike if the weak yen pushes up inflation more than expected.
Many market players expect the BOJ to raise interest rates this year from the current near-zero level. Some expect a move as early as July, partly to slow the yen’s ongoing decline.
When asked what the central bank would do with its massive balance sheet, Himino said the BOJ would make a decision that would focus on the impact it would have on the economy, prices and its goal of making the 2% inflation target sustainable. reaches.
“It is desirable that the markets determine long-term interest rates. On the other hand, the BOJ has been heavily involved in the bond market until recently and our presence remains very strong. We must prevent discontinuity or unintended movements in the market. the market,” says Himino.
The comments underscore the tricky balancing act the BOJ faces in allowing market forces to push up long-term interest rates while avoiding an abrupt spike in bond yields.
In March, the BOJ ended eight years of negative interest rates and a policy that limits long-term borrowing costs to around zero, known as yield curve control (YCC).
The decision was partly intended to breathe new life into a market that had become dormant due to the BOJ’s massive presence, and allow market forces to drive yield moves.
Markets are focusing on whether the BOJ will make a full-fledged cut in its massive bond purchases at its next policy meeting on June 13-14.
Ten-year government bond yields briefly rose to 1.1% last week, the highest level since July 2011, on growing expectations of a short-term rate hike.
(Reporting by Leika Kihara; Editing by Kim Coghill, Bernadette Baum and Susan Fenton)
