Japan’s ex-top FX diplomat sees BOJ keeping ultra-low rates this year By Reuters

Written by Leika Kihara and Yoshifumi Takemoto

TOKYO (Reuters) – The Bank of Japan (BOJ) is set to stabilize monetary policy on Friday and may struggle to raise interest rates from their very low levels this year due to a weak economy, the country’s former top currency diplomat Hiroshi Watanabe said. said on Wednesday.

With inflation surpassing the Bank of Japan’s 2% target, some market players are betting that the central bank will phase out its controversial policy to control bond yields as early as this week’s meeting.

“The BoJ has no reason to act this week,” said Watanabe, who maintains close contacts with current policymakers, with markets soured by global banking sector woes and recent data in Japan showing deteriorating business sentiment.

“In fact, the Bank of Japan may find it difficult to raise interest rates for the rest of this year,” he told Reuters in an interview as inflation is set to slow below the bank’s 2% target in the coming months.

Watanabe said if the Bank of Japan is going to raise interest rates next year, it will have to do so when US and European central banks start cutting interest rates to support their economies hurt by the strong monetary tightening now under way to combat high inflation.

He said the resulting interest rate differential could push the yen up to around 115 yen per dollar from current levels of 135.

“It will be a matter of whether Japan can tolerate this yen appreciation, and whether the Bank of Japan and the government can explain to the public the need to take such a step,” Watanabe said.

Under Yield Curve Control (YCC), the Bank of Japan sets a target of 0.1% for short-term interest rates and caps 10-year bond yields around zero as part of efforts to push inflation sustainably higher to the 2% target.

New Bank of Japan Governor Kazuo Ueda stressed the need to keep policy very loose for now, arguing that recent cost-driven inflation will fade in the coming months.

But he also pointed to the opportunity to adjust the YCC, which has drawn criticism for causing distortions in the shape of the Japanese bond yield curve and crushing commercial banks’ profits.