Ex-BOJ’s Kiuchi: Central bank to stand pat even as Japan heads back into deflation

Former Bank of Japan (BOJ) policymaker Takahide Kiuchi said that Japan is likely to slip back into deflation over the coming three years due to the coronavirus pandemic and its impact on the domestic consumption and labor market.

Key quotes

“Japan will likely see more small and midsized firms go under as the pandemic’s pain deepens, which could boost credit costs for lenders through next year.” 

“The pandemic has forced the BOJ to be more mindful of the risk of banking-sector problems, which means it can’t cut interest rates easily.” 

“Japan will need about five years for the gross domestic product (GDP) to return to pre-pandemic levels.”

“Core consumer inflation will hover in slightly negative territory for about three years.” 

“But the BOJ has already detached its policy from its 2% inflation target, which means it won’t take action to prop up prices.”

Market reaction

USD/JPY is trading close to the daily highs of 106.56, as the US dollar picks up a minor bid amid the downbeat market mood.

Further, uncertainty over the Japanese Prime Minister (PM) Shinzo Abe’s political career, given his ill health, weighs down on the yen, pushing the spot higher.

The major was last seen trading at 106.48, up 0.12% on the day.