The side effects of a rate cut would need to be fully examined if the central bank were to discuss such a move, Atsushi Mizuno said, adding that current monetary conditions were sufficiently accommodative with rates at 0.5 percent.
‘After experiencing a decade of an ultra-low interest rate policy, the Japanese economy’s sensitivity to interest rates has become low,’ said Mizuno, who until November had been a lone voice at BOJ policy meetings calling for a rate increase.
‘As such, cutting key interest rates would have little effect in providing additional support to the economy,’ Mizuno told Reuters in an interview.
A rise in rates to 0.75 percent by the BOJ had been seen as a done deal until the subprime crisis hit last year.
But with US rates falling and fears of a US recession that would hit Japan’s big exporters, markets are now pricing in a 50 percent chance of a BOJ rate cut this year.
‘The fact the word ’rate cut’ came out from Mizuno, the most hawkish member of the board, suggests that resistance within the BOJ for such move may not be as big as markets think,’ said Naoki Iizuka, senior economist at Mizuho Securities.
‘A rate cut could be an option, although the BOJ would not go further as to bring rates back to zero as that would come with a heavy cost, one being putting to death money market functions.’
Mizuno, a former bond strategist, was cautious about the outlook, saying that a recession is not on the horizon but Japan’s economy was expected to remain at a standstill for the next two to three months.
A sharper-than-expected fall in Japanese housing investment, blamed on tighter building regulations adopted last June, and rising raw material costs had increased the need to examine whether the nation’s positive economic cycle was still functioning, Mizuno said.
Mizuno, who worked at Nomura Securities and Deutsche Securities before joining the BOJ, said such domestic risk factors, rather than overseas developments, were behind his decision in December to drop a proposal he had pursued since July to raise rates.
The US slowdown would not be too deep, but the key question was how fast it would recover later this year, Mizuno said.
‘I cannot deny the possibility of an L-shaped recovery in which the US economy does not recover to around potential growth until 2009, if the US financial and household sectors go through serious balance-sheet adjustments,’ he said.
But he was confident that the global economy could still achieve around 4 percent growth this year, led by strength in emerging economies.
The policy direction should still be to hike, not cut, rates toward more normal levels, Mizuno said, adding that he would consider the need for a rate hike if data in the coming months heightened chances the economy would resume a gradual expansion.
Mizuno said stock and foreign exchange markets warranted a close watch in guiding monetary policy as market volatility, if sustained, could hurt sentiment and affect the economy.
But market moves alone would not lead to a monetary policy shift, he said, stressing that the BOJ would take a comprehensive view on how they would affect the economy in making a rate decision.
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