- BOJ must raise rates in gradual manner, Takata says
- Hard to pre-determine desirable pace, degree of rate hikes
- BOJ must 'take time and be prudent' in bond taper
KYOTO, Japan, Feb 26 (Reuters) - The Bank of Japan must focus on the risk of an inflation overshoot in guiding monetary policy, hawkish board member Hajime Takata said on Thursday, calling for gradual interest rate hikes.
Takata, who proposed unsuccessfully to raise interest rates in January, repeated his view that Japan has already achieved the central bank's 2% inflation target with the economy having fully emerged from prolonged stagnation.
The massive fiscal and monetary stimulus deployed across the world, coupled with the investment boom in artificial intelligence (AI), could push up global growth and add to already growing inflationary pressure in Japan, he said.
"Medium- and long-term inflation expectations are heightening, and price increases now have a greater tendency to generate second-round effects," Takata said in a speech to business leaders in Kyoto, western Japan.
Corporate behaviour remains positive even after the BOJ's decision to hike rates in December, as deeply negative real borrowing costs spark lending across a wide range of sectors, Takata said.
"It is necessary to conduct further rate hikes in a gradual manner," with an eye on overseas developments and domestic financial conditions, he said.
Such an approach would be better than raising rates based on a presumed neutral rate of interest that neither cools nor overheats the economy, given the difficulty of estimating the neutral level, Takata said.
In a press conference after the speech, Takata said it was hard to determine how quickly and how far the BOJ should hike rates as that would largely depend on future economic developments.
"As for whether I will continue proposing a rate hike in March and April, that's something I would like to decide based on economic developments at the time," he said.
Takata is considered the most hawkish in the nine-member board. He was among two members who dissented to the central bank's decision to keep rates steady in October.
PRUDENT TAPER REQUIRED
The BOJ raised its short-term policy rate to a 30-year high of 0.75% in December. It kept policy steady at a subsequent meeting in January, turning down Takata's proposal for another hike to 1.0%.
The BOJ has also been tapering its bond purchases since 2024 to reduce its massive balance sheet accumulated from decades of heavy money printing to reflate the economy. The board will conduct an interim review of its bond-taper plan in June.
A former bond market strategist, Takata said the BOJ should "take time and be prudent" in slowing its bond purchases.
"During the process of normalising monetary policy, it's desirable to avoid causing market volatility that significantly exceeds the risk premium demanded by market players," he said.
The BOJ must be mindful of "unexpected structural changes," such as weakening demand for super-long Japanese government bonds (JGB), and scrutinise market developments when conducting the interim review of its bond-taper plan, Takata said.
The central bank must be ready to take steps, he said, such as emergency bond-buying operations in exceptional cases of extreme market volatility.
Reporting by Leika Kihara; Editing by Sam Holmes and Shri Navaratnam
Source: Reuters