–Members Agree Central Bank Needs to ‘Patiently’ Continue with Monetary Easing for Now Amid High Uncertainty
By Max Sato
(MaceNews) – Bank of Japan board members stressed that they need to closely monitor wage negotiations between major firms and their labor unions that take place in the early parts of next year as they set the tone for average wage hikes for fiscal 2024, and thus the key to achieving the bank’s stable 2% inflation target, according to the summary of opinions expressed at the BOJ’s Oct. 30-31 meeting released Thursday.
But the policymakers agreed that their job of guiding low inflation toward their target without counting on higher costs for energy and commodities is not done yet. Several board members called for “patiently” maintaining the bank’s overall monetary easing stance aimed at keeping borrowing costs low for households and businesses and thus supporting sustained economic recovery.
“In order to confirm that the virtuous cycle between wages and prices has intensified, close attention needs to be paid both to next year’s annual spring labor-management wage negotiations and to whether the wage increases will be reflected in prices,” one member said.
Another member was more specific: “Developments in wage hikes by firms next spring will be a major key to achieving the virtuous cycle between wages and prices.” Spring months are from March to May in Japan.
Major firms usually respond to labor union demands in mid-March, setting the tone for average wage hikes for the fiscal year that begins on April 1. The focus is also on how small businesses, which employ about 70% of the workforce, will follow the lead set by large automakers, electric firms, retailers and restaurant chains.
“While the outlook for Japan’s inflation rate has been revised upward, this is mainly due to cost-push factors,” a cautious member noted. “To achieve the 2 percent target in a sustainable and stable manner, after these factors disappear, the virtuous cycle between wages and prices needs to keep operating in a self-sustaining manner.”
Among optimistic views, one member said, “It is highly possible that the wage growth to be agreed in next year’s base pay negotiations will exceed that agreed this year, as suggested by the fact that this year’s inflation outlook of
the private sector, which is a starting point for the negotiations, is higher than last year.”
The member also said, “Considering this possibility, as well as upward movements in inflation expectations and underlying inflation, it seems that achievement of the price stability target is coming into sight. The second half of fiscal 2023 will be an important period for determining whether the target will be achieved.”
Keeping Easing Bias Amid Uncertainty
On the conduct of monetary policy, one member said, “Sustainable and stable achievement of the price stability target is not yet envisaged with sufficient certainty at this point, and thus the bank needs to patiently continue with monetary easing under yield curve control.”
Another member said, “With extremely high uncertainties surrounding economies and financial markets at home and abroad, it is appropriate for the bank to increase the flexibility in the conduct of yield curve control, so that long-term interest rates will be formed smoothly in financial markets in response to future developments.”
“Japanese long-term interest rates have been under unexpected upward pressure that reflects the effects of a rise in U.S. long-term interest rates,” a third member said. “Given this situation, while the bank needs to patiently continue with monetary easing, further increasing the flexibility in the conduct of
yield curve control is desirable.”
There was a cautious view against even tweaking the policy framework. “It is still unclear whether wage increases that exceed price rises will be achieved, and revising yield curve control at this time could be perceived as monetary tightening,” one member said. “In order not to lose the opportunity to achieve a virtuous cycle between wages and prices, it is appropriate for the bank to patiently continue with the current monetary easing for the time being.”
At the October meeting, the board decided in an 8-to-1 vote to make its seven-year-old yield curve control framework “more flexible” by calling its desired 1 percent upper end of the 10-year Japanese government bond (JGB) yield a “reference,” instead of a definite line that the bank has been trying to defend with market operations. It also discontinued the range for the long bond yield, which had been set between minus 0.5 percent and plus 0.5 percent.
The visual image provided by the bank shows the 1% upper end is now a fine dotted line, instead of the bold red defense line that it had set in July to protect with massive fixed-rate bond buying operations.
The board also voted unanimously to maintain its basic monetary easing stance, keeping its long-term interest rate target officially “around zero percent” and the target for the overnight rate at minus 0.1%, with large asset purchases intact, in a decade-long campaign to achieve stable 2% inflation with sustainable wage growth.
Side Effects of Fixed Rate Market Operations
The bank dropped its July decision to offer to buy 10-year JGBs at 1.0% every business day through fixed rate purchase operations unless it is highly likely that no bids will be submitted. This type of market operation “will have strong positive effects, but could also entail large side effects,” the bank said.
“Even with some upward movements in nominal long-term interest rates, it is likely that real long-term interest rates will continue to be negative and the effects of monetary easing will remain strong,” one member said. “On the other hand, if the nominal long-term interest rates continue to be strictly capped through fixed-rate purchase operations for consecutive days, there is an increasing risk of large side effects on market functioning and market volatility.”
Looking ahead, another member said, “Increasing the flexibility in the conduct of yield curve control is quite favorable not only in terms of constraining the materialization of side effects and thereby effectively continuing with monetary easing until an exit, but also in terms of smoothly proceeding with normalization of monetary policy while maintaining monetary easing after the future exit.”
Governor Kazuo Ueda told a post-meeting news conference on Oct. 31 that the decision to make the policy framework more flexible was partly due to an upward revision to the board’s inflation forecast but largely due to upward pressures on the JGB yields from overseas bond markets.
July Tweaking
At its July meeting, the board decided in an 8-to-1 vote to make the bank’s existing reference range for the 10-year bond yield more flexible, basically keeping the range of minus 0.5% to plus 0.5%, but expanded its ultimate defense lines to minus 1.0% and plus 1.0% in market operations. The July vote on the overall easing stance was unanimous.
By providing “greater flexibility” to its market operations, the bank hopes to avoid being forced to abandon the yield curve control policy framework when long-term interest rates come under persistent upward pressures. It also hopes to allow a natural uptick in long-term interest rates that reflects economic recovery with substantial wage hikes and mitigate the negative impact of artificially suppressing interest rates, which has paralyzed bond market functions and could negatively affect other financial markets.
The board remains cautious about making a fundamental change to the yield curve control framework, which was adopted in September 2016. A negative interest rate for the overnight rate was introduced in January that year.
Under the current framework, the BOJ is keeping the 10-year government bond yield, the benchmark for long-term borrowing costs, at around zero percent by buying “a necessary amount” of Japanese government bonds “without setting an upper limit,” and to keep the overnight interest rate at minus 0.1% by charging 0.1% interest on a part of cash reserves parked at the bank by financial institutions.