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The chairman of a Liberal Democratic Party panel on monetary policy said Wednesday the economy was not ready for higher interest rates and called on the Bank of Japan to delay any move to push them higher.

“The market consensus is for ending the ‘zero-interest-rate’ policy in July or August, but I don’t think (it should happen then),” Kozo Yamamoto, chairman of a subcommittee of the LDP’s Research Commission on the Financial and Banking System, said in a speech.

Yamamoto said various factors, including an expected downward revision of the consumer price index in August and the latest stock price plunges, show the economy is not ready for interest rate hikes.

“If the BOJ neglects these (factors) and goes for raising interest rates, it will fail as it did in August 2000,” Yamamoto said.

He was referring to the central bank’s decision at that time to end the ultralow interest rate policy. Despite strong opposition from the government and ruling-party lawmakers, BOJ raised the overnight call rate by 0.25 percentage point from near zero, believing the nascent recovery would continue.

Instead, the economy fell back into recession, mainly due to the global collapse of the information technology bubble. The BOJ was forced to reinstate the zero-rate policy under a quantitative easing framework in March 2001.

Yamamoto said the central bank should raise the overnight call rate only after verifying a sustained rise of at least 0.5 percent in the core CPI, which excludes perishable goods, after the index is revised in August.

He did not say when the BOJ should raise rates, but suggested the central bank would face difficulty raising the key short-term rate even in September or October because of the September LDP presidential election and expected slowdowns in the Japanese and U.S. economies.

Yamamoto, who strongly favors the introduction of an inflation target, also asked the central bank to firmly commit itself to a reference range of zero to 2.0 percent for inflation, which it adopted after ending its quantitative easing policy on March 9.

An inflation target would help stabilize market expectations and increase transparency in monetary policy, which would benefit both investors and consumers, he said.

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