TOKYO/KANSAS CITY (Reuters) – A former adviser to late Japanese Prime Minister Shinzo Abe voiced opposition to ending negative interest rates any time soon, saying premature action by the central bank would push the economy back into deflation.
Speculation is rife that the Bank of Japan may ditch negative rates as early as March or April given expectations that major firms will offer higher pay rises at annual spring labour-management talks due to wrap up March 13.
However, small firms, which conclude wage talks by June, have a high ratio of workers' share of corporate profits, making it difficult to raise wages further.
"While uncertainty is high, (I) oppose (ending negative rates.) It's too early," Etsuro Honda, former special advisor to the cabinet, told Reuters.
Read more: Japan inflation slows for third consecutive month to 2pc
"Negative rates are used for inter-bank operations, which apply risk premiums when it comes to corporations where no one's asking for borrowing with negative rates," he said.
Honda still wields influence with policymakers and lawmakers.
Last week, he was invited to lecture a gathering of lawmakers led by Sanae Takaichi, a former policy affairs chief at the rulingLiberal Democratic Party and seen as potentially Japan's first female prime minister.
Honda was an architect of the stimulus policy dubbed 'Abenomics' – a mix of bold monetary easing, flexible fiscal policy and reform, which helped the economy escape more than a decade of deflation.
NO NEED TO 'PRE-EMPTIVELY' CUT RATES
Kansas City Federal Reserve Bank President Jeffrey Schmid on Monday used a debut speech on policy to signal that he remains focused on the threat of high inflation and is in no rush to cut US interest rates.
"With inflation running above target, labor markets tight and demand showing considerable momentum, my own view is that there is no need to pre-emptively adjust the stance of policy," Schmid said in his first extensive public remarks since he began the job last August.
"Instead, I believe that the best course of action is to be patient, continue to watch how the economy responds to the policy tightening that has occurred, and wait for convincing evidence that the inflation fight has been won."
Schmid's approach suggests a hawkish outlook in sync with recent Kansas City Fed presidents; indeed, he told the Economic Club of Oklahoma that both Esther George and Thomas Hoenig are "dear friends."
His approach is also one that resonates at least for now with the message of other Fed policymakers in recent weeks signalling they want to keep the policy rate in its current 5.25 per cent-5.5 per cent range until they have greater confidence that inflation is headed to the Fed's 2pc goal.
Shipping disruptions in the Red Sea could put renewed upward pressure on goods prices, Schmid said, and hotter-than-expected consumer price inflation in January, especially for services, argues for "caution" on expectations for further disinflation.
"A further moderation in demand could be needed to tame price and wage pressures," he said.
Schmid also signalled hawkishness with regards to the Fed's balance sheet. He said he is in "no hurry" to halt the ongoing reduction in the size of the balance sheet, and does not favour an "overly cautious approach" on the runoff.
Some Fed policymakers have argued that the time may soon come to slow those reductions to give time for the Fed to assess how far it can shrink its portfolio without roiling markets.
"Some interest rate volatility should be tolerated as we continue to shrink our balance sheet," Schmid said. Shrinking the balance sheet and reducing the Fed's footprint in financial markets should be a priority, he added.
In addition, Schmid said, banks should treat the Fed's discount window, the US central bank's facility for extending emergency loans, as part of their "strategic stack" for funding rather than just in times of crisis.