EXCLUSIVE: Rising Interest Rates in Japan ‘Sign of Health’

By Adriana Reinecke Washington, April 15 (Jiji Press)–Japan’s rising long-term interest rates are “a sign of a healthy economy” resulting from the country’s exit from long-standing deflation, senior International Monetary Fund official Tobias Adrian has said. In a recent interview with Jiji Press, Adrian, director of the IMF’s Monetary and Capital Markets Department, described the Bank of Japan’s current monetary policy as “appropriate” to keep inflation around its 2 pct target. Speaking on the sidelines of this week’s IMF-World Bank annual spring meetings in Washington, Adrian said the IMF believes “the monetary policy of the Bank of Japan is appropriate,” referring to the BOJ’s gradual raising of interest rates toward a neutral level that neither stimulates nor restrains the economy. He added that the process of policy normalization is “on track.” In the Tokyo bond market, the benchmark yield on 10-year government bonds hit a 27-year high on Monday, partly due to inflation concerns stemming from a surge in crude oil prices following U.S.-Israel military strikes against Iran. Adrian remarked that “For many, many years, policymakers in Japan have been trying to get inflation to come back towards 2 pct.” “In some sense, interest rates are rising for good reasons, right? It’s because the economy is growing strongly and inflation is back,” he continued. “I think that’s actually something to welcome.” Adrian also said that although Japan’s interest rates have risen, they remain low compared with those of other countries. He expressed the view that the yen will continue to play “an important role” in global markets. In its Global Financial Stability Report released Tuesday, the IMF said that an unwinding of carry trades, in which investors borrow in low-interest yen and invest in higher-yield currencies, “could affect global capital flows.” If Japanese investors, major buyers of U.S. and eurozone government bonds, shift funds back home, it could ripple through bond markets around the world, raising borrowing costs and putting pressure on public finances in advanced economies. Regarding Japan’s high level of public debt, Adrian observed that given the BOJ’s large holdings of government bonds, the amount held by the private sector is relatively small. He expressed the view that the country’s high debt level is “quite manageable” on balance. In the foreign exchange market, the yen has been weakening against the dollar amid safe-haven dollar buying owing to rising geopolitical tensions. Adrian said that while authorities may be advised to intervene in cases of disorderly market conditions, floating exchange rates are generally “a useful shock absorber.” END [Copyright The Jiji Press, Ltd.]