MUFG Chief Says BOJ Should Revisit 2% Inflation Target

(Bloomberg) -- The Bank of Japan should consider modifying its inflation target because the economy is improving even without spurring prices, according to the chief executive officer of the nation’s biggest bank.

An aging population and declining birth rates contribute to a “lower potential inflation rate and lower potential growth rate,” Mitsubishi UFJ Financial Group Inc. CEO Nobuyuki Hirano said Wednesday in an interview in MUFG’s Manhattan office. “The question here is whether we need to keep 2 percent target inflation rate as it is, given the fact that the Japanese economy continues to grow and employment environment is favorable.”

Easing the inflation target would give the central bank room to make changes to its ultra-low interest-rate policy, which has crimped banks including MUFG by squeezing their lending profitability. The BOJ’s next meeting ends on July 31, and there’s speculation that officials are looking for ways to keep their stimulus program sustainable while reducing the harm it causes in markets and to lenders.

While Japan’s consumer prices have been rising for more than a year, core inflation was only 0.8 percent in June, far from the central bank’s target. Governor Haruhiko Kuroda and his board are expected to lower their price forecasts at next week’s meeting while also avoiding any change in the inflation target by reiterating a commitment to reaching the 2 percent goal.

“Now the inflation rate is constantly in positive zone, that’s good news," Hirano said, adding that he has frequent discussions with the BOJ. Still, “it has been a difficult time for financial institutions or banks who rely on net interest income as the interest rate stays at almost zero or sometimes negative.”

Hirano, 66, was an early critic of negative rates when they were introduced in Japan in early 2016. In April of that year, he said the policy contributed to anxiety among households and companies and that prolonging it may weaken financial institutions.

Bond Plea

One recent concern about the BOJ policy among banks has been over its purchases of corporate bonds, Bloomberg has reported. Lenders are privately asking the central bank to stop buying the bonds at negative rates, saying the practice puts downward pressure on loan rates, according to people familiar with the matter.

MUFG’s shares have slumped 16 percent this year, more than those of Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. The three so-called megabanks are scheduled to report fiscal first-quarter earnings next week.

Read a preview of Japanese bank earnings

In the interview, Hirano also said:

• Wealth management is a growth area, especially in Japan where the firm has a partnership with Morgan Stanley. MUFG is also the largest shareholder of the U.S. bank
• Cross-border mergers and acquisitions will continue to advance as Japanese companies seek to find growth abroad, particularly in the U.S.
• MUFG plans to increase its ownership of PT Bank Danamon Indonesia, in which it agreed to buy a 19.9 percent stake in December. Hirano said his bank will continue to expand in the Asia-Pacific region after a series of deals in Thailand, Philippines and Vietnam
• While the lender is still expanding in the U.S., Hirano said he’s “concerned, certainly” about trade tensions spurred under U.S. President Donald Trump. He said an increase in the price of goods will impact investment, undermine consumer appetite and force many industrial and manufacturing companies to relocate operations. “It will change the way companies run their business"

To contact the reporter on this story: Sonali Basak in New York at sbasak7@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Steven Crabill, Russell Ward

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