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BOJ board member warns of protectionism

ReutersBank of Japan board member Makoto Sakurai warned on Thursday the spread of protectionist trade measures was creating uncertainty in the global economy and could result in Japan’s economic growth performing below BOJ projections.

Sakurai, who is seen as representing the central bank’s mainstream view on monetary policy, said the BOJ should continue its strong monetary easing for the time being, while also monitoring the side-effects of prolonged stimulus.

Sakurai made the comments in a speech to business leaders in Akita, northeastern Japan, as the International Monetary Fund cut Japan’s economic growth forecast for 2018, warning the country faced increased risks from global trade uncertainty.

The BOJ’s policy board forecast Japan’s economy would grow 1.5 percent in the year to March 2019, and 0.8 percent in each of the following two years - a pace that the BOJ also considers to be its growth potential.

However, “there’s a risk that growth could fall short of such main projections depending on the extent of protectionist moves and capital outflow from emerging economies,” Sakurai said.

He later told a news conference that given Japan’s solid economic growth, there was at present no need for further easing in the face of uncertainty.

The Nikkei share average fell to a one-month low on Thursday as markets sold off globally, in part owing to investor concerns about rising market interest rates in the United States.

“Sakurai was clearly putting focus on downside risks. In addition, today’s tumbling share prices should show the need to watch instability in the global financial markets as well,” said Izuru Kato, chief economist at Totan Research.

“Raising interest rates in such an uncertain environment would be a gamble for the BOJ’s policy board. As such, the bank will take a wait-and-see stance for the time being.”

Japan’s inflation is struggling to achieve the BOJ’s 2 percent target even though economic demand is stronger than economic output and so growth has exceeded potential, Sakurai said.

“It’s hard to think lack of demand is the cause of sluggish price growth,” he said.

He said a stubborn deflationary mind-set among the public and enhanced corporate productivity to cope with labor shortages were holding back inflationary momentum.

“It is appropriate to take time to continue monetary easing under the current forward guidance framework, while paying heed to side-effects,” he said.

Under its yield curve control policy adopted in 2016, the BOJ has pledged to guide short-term interest rates to minus 0.1 percent and to cap the 10-year government bond yield around zero percent.

Mindful of the rising cost of prolonged easing — such as damage to the banking system — the BOJ took steps in July to make its policy framework more sustainable, notably letting bond yields move more flexibly around its zero percent target.

The BOJ’s policy board holds its next review on Oct. 30-31, when it will also update quarterly economic and price forecasts. Speech

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