By Leika Kihara
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 market’s artificial intelligence (AI) boom, 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.
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.
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%.
(Reporting by Leika Kihara; Editing by Muralikumar Anantharaman and Sam Holmes)
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