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BOJ shouldn't ease more while inflation hopes intact: IMF's Shinohara

Naoyuki Shinohara, the deputy managing director of the International Monetary Fund (IMF), speaks during an interview with Reuters in Colombo
Naoyuki Shinohara, the deputy managing director of the International Monetary Fund (IMF), speaks during an interview with Reuters in Colombo

By Tetsushi Kajimoto

TOKYO (Reuters) - The Bank of Japan should steer clear of further monetary easing as long as inflation expectations are on the rise, even though its 2 percent price goal is unlikely to be met in two years, a senior International Monetary Fund official said on Friday.

Japan should not rely excessively on monetary easing to stimulate its economy as it could cause an economic bubble and a spike in long-term interest rates, Deputy Managing Director Naoyuki Shinohara told Reuters in an interview.

"I respect the (BOJ's) 2 percent inflation goal but there's no reason to insist that it (the timeframe) must be two years," Shinohara said. "As long as inflation expectations steadily rise, there's no need to add to the current quantitative easing."

The BOJ launched aggressive monetary stimulus last April, pledging to boost purchases of government debt and riskier assets under quantitative easing to end 15 years of deflation and meet 2 percent inflation in roughly two years.

Few investors believe the inflation target will be met in the given timeframe, while many are expecting that the BOJ could be forced to ease policy further in case if it fails to fulfill its commitment.

"(The BOJ) should wipe out such expectations that the BOJ must do something additional in case if it cannot achieve the 2 percent in two years," Shinohara said, adding that the IMF forecasts inflation in Japan will reach 2 percent in 2017.

Monetary easing must be accompanied by medium-term fiscal consolidation and structural reforms to boost growth, or it could cause side-effects such as a spike in interest rates on concerns the bank may be monetizing government debt, he said.

The BOJ easing helped the yen weaken about 17 percent over the past year, which has supported Japanese exporters. The dollar last stood at around 102.80 yen, after hitting a five-year high of 105.44 yen earlier this month.

Shinohara, a former Japanese top financial diplomat tasked with overseeing Tokyo's currency policy, said there was no change in the IMF's view that the yen is slightly undervalued against Japan's medium- to long-term economic fundamentals.

But Shinohara shrugged off concern that yen weakness may cause friction between Japan and the United States, a key trading partner.

"It is clear that what Japan is trying to do now is to beat deflation," he said.

"There may be some changes in the way (the U.S. government) communicates due to its relations with the Congress," he said. "But I don't feel Japan's weak yen is seen as a big problem. Of course it would be different if (Japan) intervenes or manipulates currencies, though."

U.S. Treasury Secretary Jack Lew said last week that Japan's long-term growth cannot be rooted in unfair reliance on exchange rate advantage.

But Shinohara said he took the remark as urging Japan to carry out pro-growth reform to boost its growth potential, rather than relying on monetary policy excessively.

(Additional reporting by Yuko Yoshikawa; Editing by Shinichi Saoshiro & Kim Coghill)

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