BOJ must be clear when explaining policy

The Bank of Japan on Thursday decided not to raise its key short-term interest rate, an increase that would have been the first rate hike since the central bank lifted its zero-interest-rate policy in July. At the Policy Board meeting, the nine-member panel voted 6-3 to maintain the current monetary policy.

It was the right decision to postpone a rate hike. But it was not good that a chaotic situation has arisen in which the central bank's credibility could be undermined.

It has been reported that the nation's economy is expanding, supported by healthy corporate performances. However, individual consumption lacks robustness and the trend toward price increases is weak.

When the central bank postponed a rate hike at a policy setting meeting in December, Gov. Toshihiko Fukui said, "We need further data" on consumption and prices.

There have been no economic figures since that decision that suggest the rate should be increased.

The Bank of Japan poses a scenario in which healthy corporate performance positively impacts individual households. Is this scenario becoming a reality?

The central bank must scrutinize the scenario and the actual economic situation, then take the necessary steps to ensure that we break away from deflation.

When compared with other countries, Japan's interest rate level is extremely low. It must be raised gradually as the economy recovers.An increase should not be made in haste, but instead when consumption appears certain to improve and both wages and prices are expected to increase.

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Pols should show restraint

Key government and ruling camp members applied pressure on the central bank before the latest policy meeting, with some going as far as hinting at revisions of the Bank of Japan Law.

Following the policy meeting, Fukui denied any political consideration in the decision, telling reporters, "The decision was made based on economic and price conditions--not on other factors."

But as the decision was to not raise the interest rate, some observers are saying the Bank of Japan caved to political pressure.

If this view spreads, it could greatly damage the credibility of the Bank of Japan's neutrality in policy making. The central bank's independence is legally guaranteed. Politicians in the ruling bloc should refrain from making comments that would undermine that independence.

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Communication is key

The Bank of Japan is not good at speaking its mind. There was initial speculation the central bank would raise the key interest rate. But such forecasts disappeared just prior to the two-day meeting, with both the long- and short-term interest rates taking a beating in the market Wednesday.

It comes down to this: The Bank of Japan did not have enough dialogue with the market.

During the meeting, three members of the Policy Board opposed the current monetary policy and jointly tabled a motion to raise the key interest rate. Due to this development, there likely will be more speculation of a rate increase at the next policy meeting next month.

The central bank is required to do its utmost to explain its policy stance so as not to cause confusion in the market. To do so, it must maintain close communication with the government and the ruling coalition.

If it does decide to raise the key interest rate, the Bank of Japan needs to communicate to the public in easy-to-understand terms why it has chosen to do so. The central bank is now at a crucial stage in which its ability to explain will be put to the test.