–Members Continue to Link Timing of Exit to Clearer Signs of Sustained Wage Growth
–A Few Members Warn About Falling Behind Curve in Unwinding Stimulus
By Max Sato
(MaceNews) – Bank of Japan board members continued to discuss the need to carefully unwind the bank’s monetary easing measures, with many linking the timing of an exit from near zero interest rates and large asset purchases to clearer signs of sustained wage growth and a few warning against falling behind the curve, according to the summary of opinions expressed at the BOJ’s Jan. 22-23 meeting released Tuesday.
Policymakers agreed that they must maintain their easing stance “patiently” to support economic activity and structural reform toward sustainable wage increases and stable inflation around 2%.
“Sustainable and stable achievement of the price stability target has not yet come in sight, and thus the Bank needs to patiently continue with monetary easing under yield curve control,” one member said. “Going forward, if a virtuous cycle between wages and prices is confirmed and achievement of the target comes in sight, the Bank will likely determine whether to continue with its large-scale monetary easing measures, including the negative interest rate policy.”
Another member agreed: “To achieve the price stability target of 2 percent, it is necessary that wage growth continue to clearly exceed 2 percent and that the virtuous cycle between wages and prices intensify further.”
Some members sounded more optimistic.
One of them said: “There is a growing possibility that wage revisions for this spring will be at relatively higher levels than in the past; in addition, economic activity and prices overall have been on an improving trend. Given these factors, it seems that conditions for policy revision, including the termination of the negative interest rate policy, are being met.”
“The Bank has likely entered a phase where it needs to determine the likelihood of achieving the price stability target of 2 percent in a sustainable and stable manner by examining individual economic indicators,” another member said.
A third member was more specific about the timing, noting, “After assessing the degree of macroeconomic effects of the Noto Peninsula Earthquake by monitoring its impact for about the next one or two months, the Bank is highly likely to reach a point where it can normalize monetary policy.”
Clearer signs of substantial wage hikes in fiscal 2024 starting in April may emerge from the results of annual wage talks between major firms and their trade unions that usually come out in mid-March. Policymakers may have to wait until later to confirm whether smaller firms, which employ about 70% of the workforce, can afford to follow the lead of large corporations.
Last week, Japan’s government maintained its overall assessment for the second month in a row, saying the economy is recovering moderately with some soft spots, but warned in its monthly economic report that the powerful New Year’s Day earthquake in the northwestern region of Hokuriku has reduced electronic parts supply and battered tourism.
“Given the current outlook for economic activity and prices, it is highly likely that accommodative financial conditions will be maintained even if policy actions such as the termination of the negative interest rate policy are implemented,” one board member said, echoing remarks made by Governor Kazuo Ueda at a post-meeting news conference last week.
At its January meeting, the BOJ board decided unanimously, as expected, to maintain its seven-year-old yield curve control framework and retain its guidance that it will “patiently continue with monetary easing” to “achieve the price stability target of 2% in a sustainable and stable manner, accompanied by wage increases.”
“Japan’s economy is likely to continue recovering moderately for the time being, supported by factors such as the materialization of pent-up demand, although it is expected to be under downward pressure stemming from a slowdown in the pace of recovery in overseas economies,” the bank said, repeating its assessment in its quarterly Outlook Report for October.
Discussion among board members turned more specific this month.
“Now is an important time to consider whether to adjust the degree of monetary easing down from the current extremely powerful level,” one member said. “In considering this, it is necessary to discuss the treatment of yield curve control and of the negative interest rate policy and to deliberate on the inflation-overshooting commitment.”
Another member called for scaling back the bank’s large asset purchases.
“The Bank’s purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) have been conducted as part of its large-scale monetary easing,” the member said. “It is therefore natural for the Bank to discontinue these purchases once sustainable and stable achievement of the 2 percent target comes in sight. As the purchase amount of these assets has been very small since the change in the guidelines for asset purchases in March 2021, even if the Bank discontinues the purchases, it is likely that the impact on factors such as market conditions will not be significant.”
A few members warned about the risk of falling behind the curve in the process of planning an exit from the highly accommodative policy framework.
“In order to proceed deliberately along the path of monetary policy normalization in response to developments in economic activity and prices, the Bank needs to decide on the termination of the negative interest rate policy at an appropriate timing as a first step toward the normalization,” one member said. “A delay in making this decision creates the risk of undermining achievement of the 2 percent target and of necessitating rapid monetary tightening.”
“Shifts in monetary policies of overseas central banks could reduce the flexibility of the Bank’s monetary policy,” another member said. “Now is a golden opportunity, and the Bank’s policy decisions need to take into account that, if it continues with the current monetary policy, the accompanying side effects will remain until the next recovery phase, particularly that of overseas ec