BoJ maintains ultra-loose policies
Japan inflation eases as pay negotiations stay in focus
The Bank of Japan maintained its signature monetary easing measures on Tuesday, as speculation grows of a shift away from its ultra-loose stance. After a two-day policy meeting, board members decided to keep interest rates in negative territory—a global anomaly that has depreciated the yen—while also leaving unchanged the band in which rates for 10-year government bonds fluctuate. Analysts had predicted the BoJ would stand pat on Tuesday, partly to avoid further disruption after an earthquake on New Year’s Day killed at least 233 people in central Japan.
But Governor Kazuo Ueda is eventually expected to move away from the bank’s long-standing ultra-loose policies that economists see as unsustainable. After the policy announcement, Ueda suggested that a major shift was not on the horizon.
“Even if... hypothetically, the negative interest rates were lifted, we can say that the extremely easy financial environment will continue for the time being,” he told reporters. The likelihood of Japan meeting the central bank’s long-standing goal of sustained two percent inflation “continues to grow gradually”, Ueda said.
Japan’s inflation, excluding fresh food, slowed in December to 2.3 percent, figures showed Friday.
But the BoJ sees the increases as driven by temporary factors including higher energy costs, and instead wants to see a “virtuous cycle” of inflation fuelled by demand and higher wages. On Tuesday the bank revised down its inflation forecast for the next fiscal year to 2.4 percent from 2.8 percent.
All eyes are now on upcoming annual pay negotiations, with unions expected to make more ambitious demands than in previous years. Ueda said the bank would “continue to carefully analyze various data” including the wage negotiations to assess whether its two percent target had been achieved in a demand-driven way.
The bank in April launched a review of its “non-traditional” attempts to end the deflation that has plagued Japan since the 1990s, after the bubble era. And for several months, policymakers have hinted that they could be willing to change direction, including by making minor tweaks to their yield curve control program that keeps a grip on bonds. Timing is everything, however—with Ueda facing pressure to normalize while minimizing any economic shocks.
“As a virtuous cycle from income to spending gradually intensifies, Japan’s economy is projected to continue growing at a pace above its potential growth rate,” the BoJ said in a statement on Tuesday.
Even so, “there are extremely high uncertainties surrounding Japan’s economic activity and prices”, it added. “The bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions.”
Former BoJ board member Sayuri Shirai told AFP that if the bank wants to achieve two-percent inflation in a stable manner, “it’s not the right time, because Japanese consumption is so weak” and wage rises are low in real terms.
However, “if the BoJ wants to implement normalizes regardless of the sustainability of the two percent target, it’s better to do it this year,” before inflation dips back below two percent, said Shirai, an economics professor at Keio University. Katsutoshi Inadome, senior strategist at SuMi TRUST, noted before Tuesday’s decision that the bank was likely to “only change policy tentatively and in stages”.
The shock of the January 1 earthquake, which devastated parts of the remote Noto Peninsula, may also have made bank officials think twice this time.
“Until the damage and economic impact of the Noto earthquake are assessed, it is difficult for the BoJ to change its policy,” Inadome said.