BOJ policymaker calls for keeping ultra-low rates, sees risks balanced

© Reuters. FILE PHOTO: A man walks in front of the headquarters of Bank of Japan in Tokyo, Japan, January 18, 2023. REUTERS/Issei Kato

By Leika Kihara

FUKUSHIMA, Japan (Reuters) -Bank of Japan (BOJ) board member Junko Nakagawa said on Wednesday the central bank must maintain ultra-loose monetary policy for the time being, as the economy has yet to sustainably achieve its 2% inflation target.

She also said more time was needed to gauge whether the BOJ's decision in December to widen the band around its 10-year bond yield target would be enough to iron out market distortion caused by its heavy bond-buying.

"Since our decision in December, there were times where distortion in the yield curve eased, while at other times it intensified," Nakagawa told a news conference after meeting business leaders in Fukushima city.

"As for the impact on the corporate bond and fund-issuance market, we may need some more time to scrutinise," she said, when asked whether the BOJ could take additional steps to ease market strains at its next policy meeting on March 9-10.

Investors are heaping pressure on the BOJ to fix its yield control, with its quarterly survey showing the index measuring the degree of JGB market functioning at a record low in February, despite the BOJ's December decision to widen the band around its 10-year bond yield target to breathe life into the bond market.

On broader monetary policy, Nakagawa stressed the need to keep monetary policy ultra-loose as it was uncertain whether wages would rise enough for Japan to sustainably hit the BOJ's 2% inflation target.

"There's a chance inflation may come under downward pressure if wage hikes don't spread as much as expected," she said in a speech to the business leaders.

"It's necessary to support the economy with current monetary easing for the time being," she said.

Markets participants having been trying to gauge whether the BOJ will phase out its stimulus by adjusting its bond yield control policy when incumbent Governor Haruhiko Kuroda's second five-year term ends in April.

Kazuo Ueda, the government's nominee to succeed Kuroda, stressed the need to support the economy with ultra-loose policy for now, saying last week that a shift to tighter policy would only come when Japan's inflation trend accelerates significantly.

With inflation well exceeding the BOJ's 2% target, the central bank's implicit 0.5% cap on the 10-year bond yield - set at 0% - has come under attack by markets betting on a near-term interest rate rise.

Some investors predict the BOJ could take more steps at next week's policy meeting to address market distortion caused by its heavy-handed intervention in the bond market.

Nakagawa said the recent acceleration in inflation was driven mostly by a handful of items such as fuel, and would likely slow as the one-off effect of surging raw material costs dissipates.

But she also said price increases could intensify if corporate inflation expectations overshoot, and keep the inflation rate elevated for longer than expected.

"When looking at prices, there are both upside and downside factors at play," Nakagawa told the news conference. "At present, they are evenly balanced."