Bank of Japan plays to weak yen and fragile growth after GDP surprise

“It's a serious challenge and dilemma,” Sayuri Shirai, a professor of economics at Keio University in Tokyo, told CNBC's “Squawk Box Asia” on Thursday. She previously served as a member of the Bank of Japan's Policy Council from 2011 to 2016, where she helped make monetary policy decisions.

“However, I think the Bank of Japan is likely to make some policy changes, including… [the] “Removing negative interest rates this spring, because I think they worry about the side effects,” she said.

The yen fell to about 150 yen against the dollar this week after US inflation data came in higher than expected, dampening hopes for a faster rate cut from the Federal Reserve. The chronic weakness of the yen has reduced not only the purchasing power of consumers in Japan, but also the value of the country's exports.

“I think they want to take this opportunity to make some adjustments, and more market participants also expect the BOJ to do some normalization this spring. So regardless of whether the BOJ is able to achieve 2% in a stable way, I think the BOJ will make a decision.” . Shirai added that there will be some policy changes this spring.

Even if Bank of Japan policymakers view inflation as still not sustainably driven by domestic demand, prolonged high inflation rates have hurt domestic consumption – the main reason behind Japan's second consecutive contraction in GDP in the fourth quarter.

While inflation has been gradually slowing, “core core inflation” – which excludes food and energy prices – has exceeded the Bank of Japan's 2% target for more than a year.

Then January meetingThe Bank of Japan unanimously decided to keep short-term interest rates at -0.1%. It also stuck to its yield curve control policy, which keeps the upper bound for the 10-year Japanese government bond yield at 1% as a reference..

Policymakers at the Bank of Japan have been cautious and meticulous about their primary mission: reviving an economy mired in decades of deflationary pressures.

Many in the market expect the Bank of Japan to move away from a negative interest rate regime at its policy meeting in April, once the annual spring wage negotiations confirm a trend for meaningful wage increases. The central bank believes that wage increases will translate into a more meaningful spiral, encouraging consumers to spend.

But former Bank of Japan board member Shirai said that currently Japanese yen-denominated wages and household consumption are declining.

“So, there's no indication of seeing that about your cycle between prices and wages and [consumer] Requests. So, in that sense, it is very difficult for the Bank of Japan to accept this [the path of] “Normalisation, although inflation could exceed 2% for some time,” she added.

“But at the same time, this interest [rate] The difference created a significant decline [pressure for the Japanese yen] “So you see that it is very difficult to raise interest rates,” Shirai said.

“So, even if the BOJ raises rates a little, the BOJ has to say it can't do that…continuously raise rates because the economy is weak. If they do some normalization, [it would be] Just [the] “Removing negative interest rates – then it will not have a significant impact on the depreciation of the yen.”

CNBC's Li Yingshan contributed to this story.