The Bank of Japan could face criticism from U.S. President Donald Trump as keeping the yen artificially weak if it persists in maintaining ultra-loose policy until its elusive inflation target is met, Japan's former top currency diplomat said.
Rather than considering its target as a rigid one, the BOJ should communicate by the end of this year a plan on when and how it could whittle down its massive stimulus program, Hiroshi Watanabe said on Thursday.
Watanabe, who retains close contact with international financial diplomats, said the BOJ may struggle to justify its policy of capping yields at zero with the economy in good shape and the job market near full employment.
"The BOJ may say it's capping yields at zero because inflation is distant from its 2 percent target. But if the economy is growing at, say 1.3 or 1.4 percent, the United States may not buy that argument," Watanabe told Reuters.
"Keeping yields at zero for too long could draw U.S. calls the BOJ is focusing more on currencies rather than inflation. The United States may not say directly the BOJ is resorting to currency manipulation, but could signal as such."
Japan is safe now but could face such criticism from Trump if the dollar rises to around 115 yen and U.S.-Japanese interest rate differentials widen to around 350 basis points, he said.
"The BOJ should be mindful that at some point, the United States could argue that it's using monetary policy" to keep the yen weak, Watanabe added.
The dollar is currently around 106 yen.
Global markets were shaken this month when Trump moved to impose tariffs on Chinese goods and Beijing threatened similar measures, stoking fears of a global trade war and bolstering demand for the safe-haven yen.
Japanese policymakers worry that Trump could use a similar approach he took against South Korea, which agreed on a trade pact with a side deal to deter competitive currency devaluation.
The BOJ deployed a massive asset-buying program in 2013 to achieve its 2 percent inflation target, which helped reflate growth by boosting manufacturers' profits via a weak yen.
With inflation still distant from its target, however, the BOJ revamped its policy framework to one targeting interest rates from the pace of money printing. It now guides short-term rates at minus 0.1 percent and long-term rates around zero percent.
The BOJ argues its policy is aimed at hitting its price goal and not at weakening the yen, though Trump had accused Japan in the past of using "money supply" to devalue its currency.
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