Bank of Japan Governor Haruhiko Kuroda holds a news conference at the BOJ’s headquarters in Tokyo January 18, 2023 after the central bank decided at a two-day policy meeting to maintain its policy of ultra-low interest rates. (kyodo)
TOKYO (Kyodo) – In the eyes of Japanese consumers, the Bank of Japan, the guardian of price stability, seems to have lost touch with the reality they face on a daily basis.
Japan’s core consumer inflation hit a 41-year high of 4.0 percent in December, double the BOJ’s target, and households expect more waves of price hikes in the coming months.
The BOJ says it will hold on to its massive stimulus until inflation hits its 2% target. The current rate of price increases signals that the central bank may be phasing out its easing policy, just as other central banks are raising interest rates to fight inflation.
The BOJ resisted market pressure to tweak its ultra-low interest rate policy at its January policy meeting, and Governor Haruhiko Kuroda says the 2 percent target hasn’t really been met yet. The bank wants inflation to stably reach the target.
After the BOJ surprised financial markets with its abrupt decision in December to raise its long-term government bond yield cap, expectations of a policy shift are likely to linger, especially as the Bank of Japan is set to have a new governor to succeed Kuroda in April.
Last year, energy and commodity prices rose in the midst of Russia’s war with Ukraine, and the collapse of the yen in the foreign exchange market compounded the impact, sending the consumer price index, the main indicator of inflation, higher.
Economists think a repeat of 2022 is unlikely. However, consumer prices are likely to remain elevated in early 2023 as companies do not yet feel fully able to pass on rapidly rising costs and the BOJ may come under renewed pressure to do something about it.
“Of course, the two perceptions diverge widely in a crisis situation, when consumers want immediate change and the central bank needs to keep an eye on future growth. That’s why communication is very important in central bank policy,” says Martin Schulz, chief economist at Fujitsu Ltd.
About 94 percent of consumers in a recent BOJ survey said they feel prices have increased year-on-year, while 85 percent expect they will increase in the coming year.
Annual wage negotiations between management and unions this spring will draw more focus as Prime Minister Fumio Kishida calls for wage increases in excess of inflation.
According to a survey of 33 economists conducted by the Japan Center for Economic Research, large companies are expected to offer wage increases averaging 2.85 percent in the negotiations.
“Our hope is that wages will start to rise. This would allow the inflation target of 2 percent to be achieved in a stable and sustainable manner, but we still have to wait some time,” said Kuroda at this year’s World Economic Forum in Davos, Switzerland, in his plea for the current “extremely accommodating” monetary policy.
A decade ago, the government and the BOJ agreed on an agreement in which the central bank pledged to reach the 2 percent target “at the earliest possible date”. Kuroda has referred to the target as a “global standard” that has also been adopted by other central banks such as the US Federal Reserve.
But its public recognition remains low, with 41 percent in the BOJ poll saying they were unaware of the target. Government sources previously said the decades-old deal is likely to be revised under a new governor.
When the joint deal was reached in January 2013, Japan’s core CPI was down 0.2 percent. The index rose just 0.4 percent this year from 2012. The core CPI excludes volatile fresh food prices.
Japan’s situation was unique in that it needed to stoke inflation, not curb it.
The main inflation indicator is now above the BOJ’s target for nine straight months, mainly due to rising import prices.
The BOJ continues to believe that the trend will not last long and sees a “virtuoso cycle” of price increases and wage increases in the absence. The core CPI is expected to fall below its target in the next two fiscal years.
“The likelihood of YCC (yield curve control) being abolished while Kuroda remains governor is slim,” said Shotaro Kugo, senior economist at the Daiwa Institute of Research, adding that a lot will depend on who succeeds him as BOJ chief .
As part of its yield curve control program, the BOJ keeps short-term interest rates at minus 0.1 percent and 10-year Japanese government bond yields at around zero percent, but it widened the tight trading range for the benchmark 10-year yield to minus 0.5 percent and 0.5 percent in the last month. The financial markets saw the change in monetary policy as a first step towards an exit from the bank’s massive stimulus.
“While inflationary pressures have been confirmed by higher commodity prices and a weaker yen…stronger domestic demand is also pushing prices higher to some extent,” Kugo said. Price hikes, which have been largely focused on goods, should spread further to services in order for the BOJ’s target to be met, he said.
The need to catch up from the COVID era has become apparent in recent months. Japan’s output gap, which was negative, is expected to turn positive, meaning there will be more demand than supply, a positive sign for the price outlook.
Takahide Kiuchi, executive economist at Nomura Research Institute, forecasts that core CPI growth will remain above the BOJ’s target in fiscal 2023, but will slow to 0.7 percent in fiscal 2024, compared to the BOJ’s most recent forecast of 1.8 percent.
“Expectations will fade later this year that a virtuoso cycle of wages and prices will materialize,” said Kiuchi, a former BOJ board member. “The BOJ would have to change its 2 percent target if it wants to normalize monetary policy. A redefinition as a medium to long-term goal would be one of the options.”
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