(Reuters) - Japan's inflation will turn positive more quickly than projected by the Bank of Japan (BOJ) if the yen remains at its current level around 110 per dollar for a few months, a former central bank policymaker said.
Sayuri Shirai, who ended her term with the central bank in March, told the Reuters Global Markets Forum that the policy of yield curve control introduced by the BOJ may cause credit distortion and foster "zombie companies" in Japan.
Following are excerpts from the conversation:
Q: How deep do you think the BOJ can go in cutting interest rates?
A: In Japan, there is almost no support for further cuts in the interest rate. So, unless there is substantial appreciation (the yen), the BOJ is likely to maintain status quo.
Q: Is the currency the only factor being considered by the BOJ at the moment for rate moves?
A: Unfortunately, that is what I think. In 2013, the first year of quantitative and qualitative monetary easing, it was sharp (yen) depreciation that lifted higher inflation expectations and actual inflation. So depreciation is the most important factor. I have to admit.
This yield curve control is for the time being sustainable. But if they do this for long, it will create a bigger distortion in the Japanese government bond market and also create credit distortion, which will indirectly support "zombie firms." This will suppress potential GDP growth.
There are many zombie firms. They have a lot of workers. They can survive due to low interest rates and government support. If unviable ones disappear, labor can move to new firms. This will be good for the Japanese economy.
Q: What is your view on market volatility since Donald Trump won the U.S. presidential election?
A: It was unexpected. It may be good news for the BOJ and the Japanese government. It may accelerate the timing for a price hike from early next year but we have to see if this trend is sustainable.
If the yen remains at the current level of 110 against the dollar for a few months, Japan's inflation will turn positive a little bit quicker than the recent projection by the BOJ.
If Trump can keep market expectations for deregulation, interest rate hikes by the Federal Reserve and infrastructure spending, it may be time for the BOJ to start to taper.
The BOJ should re-examine whether the 10-year bond yield at zero percent is too low from the perspective of term premium. If the BOJ raises the 10-year bond yield, it is time to taper. I think BOJ should not keep the bond yield at zero percent too long.
Q: How could it affect the BOJ’s economic forecasts and monetary policy decisions?
A: As a monetary policymaker, they should look at trends, not a few days of changes. I think the BOJ and the government want to see more depreciation since it may help the central bank achieve its 2 percent inflation target and for the government to see higher stock prices, as there is a positive correlation.
Q: Can the yen fall to 125 against the dollar?
A: The range between 100 and 110 is fair value. Firms generally want this level. 125 yen against the dollar is undervalued.
If the yen depreciates to the range of 120 to 125, consumers will suffer since their real income drops. Then there will be a chance of reversal. This may give rise to forces that lead the yen to go back to the range I mentioned.
By forces, I mean the market forces. First, inflation in Japan is lower than the U.S. and it always will be. Second, Japan's current account surplus is 3 percent of GDP. Japan holds net foreign assets. These forces will bring yen to the right range.
This interview was conducted in the Reuters Global Markets Forum, a chat room on the Eikon platform. For more information on this and other editorial forums: http://bit.ly/1kTxdKD
(Reporting by Divya Chowdhury; Editing by Neil Fullick)