*
Recent inflation driven by import costs, not demand - Ueda
*
Targeting shorter yield among options, but not only one -
Ueda
*
Trend inflation key to guiding monetary policy - Ueda
*
Wrong to tweak easy policy to address side-effects -
Uchida
*
New BOJ leadership tasked with smooth exit from ultra-low
rates
(Adds analyst quote on BOJ's possible April move)
By Leika Kihara and Tetsushi Kajimoto
TOKYO, Feb 24 (Reuters) - Incoming Bank of Japan (BOJ)
Governor Kazuo Ueda said on Friday the central bank must
maintain ultra-low interest rates to support the fragile
economy, warning of the dangers of responding to cost-driven
inflation with monetary tightening.
While signalling the chance of tweaking the BOJ's bond yield
curve control (YCC) in the future, Ueda said the bank needed to
work out the right timing and means to do so, a sign the new
chief will be in no rush to overhaul the controversial policy.
Speaking to lawmakers, Ueda said the recent acceleration in
inflation is driven largely by rising raw import costs, rather
than strong demand, adding the outlook for Japan's economy was
highly uncertain.
Global bond yields fell and Japanese stocks rallied as
Ueda's emphasis on continuity in policy tempered some market
expectation that he might seek to make a hasty exit from the
extreme stimulus of his dovish predecessor, Haruhiko Kuroda.
"It's standard practice to act preemptively to demand-driven
inflation, but not respond immediately to supply-driven
inflation," Ueda told a lower house confirmation hearing.
"Japan's trend inflation is likely to rise gradually. But it
will take some time for inflation to sustainably and stably
achieve the BOJ's 2% target," he said.
"It's true there are various side-effects emerging from the
stimulus. But the BOJ's current policy is a necessary,
appropriate means to achieve 2% inflation."
The yen was volatile through the day and
strengthened 0.03% to 134.68 per dollar.
Earlier this month, the government named the 71-year-old
academic as its pick to become next central bank governor in a
surprise choice that markets initially saw as heightening the
chance of an end to the unpopular YCC policy.
With inflation exceeding the BOJ's target, Ueda faces the
challenge of phasing out YCC, which has drawn public criticism
for distorting market functions and crushing banks' margins.
"There are various possibilities on what YCC could look like
in the future," he said, adding that there were side-effects
emerging from the policy such as deteriorating market function.
But he said for now, the BOJ needed to monitor whether the
measures it took in December, such as widening the band around
its yield target, will help ease the side-effects.
Ueda's caution against shifting policy too soon was echoed
by Shinichi Uchida, a career central banker and the government's
deputy BOJ governor nominee, who said it was inappropriate to
tweak ultra-loose policy just to deal with its side-effects.
"The BOJ's current interest rate target levels, including
the negative short-term rate, is appropriate. If Japan can
foresee inflation reaching 2%, the target levels could be
reviewed. But that won't come immediately," Uchida told
lawmakers in the same confirmation hearing.
EXIT POSSIBILITIES
Targeting shorter-maturity bond yields, rather than the
current 10-year yield, may be among options, though there are
various other ideas for tweaking YCC in the future, Ueda said.
"If trend inflation heightens significantly and sustained
achievement of the BOJ's 2% target comes into sight, the central
bank must consider normalising monetary policy," Ueda said.
In phasing out stimulus, the BOJ would do so by raising
interest rates on financial institutions' reserves parked with
the central bank rather than selling bonds, Ueda said.
Upon approval by parliament, Ueda succeeds incumbent Kuroda,
whose second, five-year term ends on April 8.
"Overall Ueda is working hard to present himself as
delivering continuity - at least to start with," said Sean
Callow, senior currency strategist at Westpac. "Now is not the
time to put his own stamp on policy; that's not why the
government selected him."
The nominations need the approval of both chambers of the
Diet, which are effectively done deals as the ruling coalition
holds solid majorities in both.
Under YCC, the BOJ guides short-term interest rates at -0.1%
and the 10-year bond yield around 0% as part of efforts to
sustainably achieve its 2% inflation target.
Facing pressure from rising global interest rates, the BOJ
was forced to raise in December the implicit cap for its 10-year
yield target to 0.5% from 0.25% - a move that fuelled market
expectations of an imminent tweak to YCC.
Ueda will chair his first policy-setting meeting on April
27-28, when the BOJ will produce fresh inflation projections.
Izuru Kato, chief economist at Totan Research and a veteran
BOJ watcher, said the central bank may need to tweak YCC soon
given the damage the policy has done to Japan's bond market.
"Ueda may ditch YCC to target to a policy solely targeting
short-term rates. I won't be surprised if he makes such a move
as early as April, when he takes up the job," Kato said.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
The BOJ’s YCC faces a reckoning ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Reporting by Leika Kihara; Additional reporting by Tom
Westbrook in Singapore; Editing by Sam Holmes)
