By Leika Kihara and Yoshifumi Takemoto
TOKYO, April 26 (Reuters) - The Bank of Japan (BOJ) is
set to keep monetary policy steady on Friday and may struggle to
raise interest rates off their ultra-low levels this year due to
the weak economy, the country's former top currency diplomat
Hiroshi Watanabe said on Wednesday.
With inflation exceeding the BOJ's 2% target, some market
players bet the central bank will phase out its controversial
bond yield control policy as early as this week's meeting.
"The BOJ has no reason to move this week," with markets
jittery of global banking-sector woes and recent data in Japan
showing souring business sentiment, said Watanabe, who retains
close contacts with incumbent policymakers.
"In fact, the BOJ might find it hard to raise rates for the
rest of this year," as inflation is set to slow below the bank's
2% target in coming months, he told Reuters in an interview.
If the BOJ were to hike rates next year, it would have to do
so when U.S. and European central banks may start cutting rates
to support their economies hit by aggressive monetary tightening
now under way to combat soaring inflation, Watanabe said.
The resulting interest-rate differential could trigger a
spike in the yen to around 115 to the dollar from current levels
around 135, he said.
"It will be a question of whether Japan can tolerate such
yen rises, and whether the BOJ and the government can explain to
the public the need to take such a step," Watanabe said.
Under yield curve control (YCC), the BOJ sets a -0.1% target
for short-term interest rates and caps the 10-year bond yield
around zero as part of efforts to sustainably push up inflation
to its 2% target.
New BOJ Governor Kazuo Ueda has stressed the need to keep
policy ultra-loose for now, arguing that the recent cost-driven
inflation will peter out in coming months.
But he has also signaled the chance of tweaking YCC, which
has drawn criticism for causing distortions in the shape of
Japan's bond yield curve and crushing commercial banks' profits.
(Reporting by Leika Kihara; Editing by Simon Cameron-Moore)
Messaging: leika.kihara.reuters.com@reuters.net))
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