Government panel member urges BOJ to anchor inflation expectations around 2%

By Leika Kihara

TOKYO, Jan 6 (Reuters) – The Bank of Japan should set policy to anchor long-term inflation expectations around 2%, former deputy governor Masazumi Wakatabe, who is currently a member of a key government panel, was quoted as saying at the panel’s meeting last month.

At the government’s top economic council meeting on December 25, Wakatabe said inflation was likely to moderate as cost-push factors dissipate and help turn real wages positive in 2026, according to the minutes of the meeting released on Tuesday.

“If all goes smoothly, Japan’s output gap will improve and the economy will start showing some bright signs,” he was quoted as saying.

“But Japan also faces risks unique to an era of inflation, such as rising interest rates,” Wakatabe said, calling for the need to maintain market trust in Japan’s finances.

“As for the BOJ, I hope it guides policy so that medium- and long-term inflation expectations are anchored around 2%,” he said.

Japanese government bond yields have risen steadily as investors focused on Prime Minister Sanae Takaichi’s expansionary fiscal policy approach that could lead to increased debt issuance.

The rise in yields also reflects market expectations of continued interest rate hikes by the BOJ, with stubbornly high food costs keeping inflation above its 2% target for nearly four years.

The remarks by Wakatabe, known as an advocate of loose fiscal and monetary policy, underscore growing attention even among reflationist advisers of Takaichi to the dangers of provoking bond vigilantes and pushing up the cost of financing Japan’s huge public debt.

Wakatabe said the government should not ignore its existing primary balance target, but focus more on lowering Japan’s debt-to-GDP ratio as a trend, according to the minutes.

The remark contrasts with a proposal he made at a panel meeting in November to ditch the government’s primary balance target, and replace it with one focusing on debt-to-GDP – a move seen by critics as watering down Japan’s commitment to rein in debt.

The panel, to which Wakatabe belongs as a private-sector member, will oversee the government’s crafting of a new long-term fiscal blueprint due around June.

The BOJ raised its short-term policy rate to a 30-year high of 0.75% at its policy meeting on December 18-19, taking another landmark step toward phasing out a massive stimulus. Governor Kazuo Ueda has stressed the bank’s readiness to keep pushing up borrowing costs if economic and price developments move in line with its forecast.

The BOJ says it looks at various indicators in measuring long-term inflation expectations, among them a quarterly corporate survey in December that showed firms expect inflation to average 2.4% one, three, and five years from now.

The central bank next meets for a rate review on January 22-23. While no policy change is expected, markets are focusing on the board’s new quarterly growth and price forecasts for clues on the pace and timing of future rate hikes.

(Reporting by Leika Kihara; Editing by Sam Holmes)