By Max Sato
(MaceNews) – Bank of Japan board members argued sustainable inflation must come from domestic demand amid moves among firms to pass higher costs onto consumers, with one pointing to downside risks to the inflation outlook from a fallback in global commodities prices later this year, according to the summary of opinions expressed at the bank’s March 17-18 meeting.
The summary also showed board members agreed that Japan’s economy still needs support from monetary easing in stark contrast to the challenges facing other major economies where consumer inflation is surging.
“It appears that firms have been passing on cost increases to a wider range of items,” a board member said, adding consumers may be accepting markups reflecting higher energy costs.
Another member projected that the year-on-year increase in the consumer price index may accelerate “clearly in positive territory from April, due mainly to a rise in energy prices, and stay at around 2% for the time being.”
A different member agreed that the annual inflation rate is “likely to be at around 2% in the first half of fiscal 2022” that begins on April 1, reflecting a surge in commodity prices, but also warned that from the second half, “attention needs to be paid to downside risks brought about by possible declines in commodity
prices.”
There is a cautious view from another member, saying that “the pass-through of cost increases to retail prices overall has been limited thus far when considering the rise in producer prices.”
“This indicates that the recovery in domestic demand has been insufficient and that it has remained difficult for firms to pass on cost increases to product prices under the current macroeconomic conditions,” the member said.
A different member agreed: “Inflation brought about by a rise in import prices will only be temporary unless there is an increase in households’ purchasing power. For sustained inflation, it is necessary to push up their purchasing power by increasing wages.”
At least one member is skeptical about achieving the bank’s 2% inflation target in the near future, saying, “Although changes continue to be observed in firms’ price-setting behavior and inflation expectations, achieving the price stability target by the end of fiscal 2023 is difficult given developments in the output gap and inflation expectations.”
The discussion at the March meeting also pointed to the difference between Japan and other major economies when it comes to seeking price stability.
“Unlike the United States and the United Kingdom, Japan is not in a situation where the inflation rate will likely exceed the price stability target of 2% in a continuous manner while accompanying rises in inflation expectations and wages,” one member said. “It is important for the bank to continue with monetary easing to support the economic recovery from the pandemic.”
Another one echoed the board’s sentiment: “Heightened geopolitical risks due to the situation surrounding Ukraine have caused price rises of energy and other items, and this will push down domestic demand while raising the CPI.”
“Under these circumstances, it is necessary to improve labor market conditions and provide stronger support for wage increases, and therefore it is increasingly important that the bank persistently continue with the current monetary easing,” the same member said.
At the March 17-18, meeting, the BOJ board decided to maintain its interest rate targets and main asset purchase program to continue supporting economic recovery, warning that there are “extremely high uncertainties” over how the war in Ukraine will affect Japan through developments in global markets, prices and other economies.
At the same time, the board also decided that from April onward, it will lower its holdings of commercial paper and corporate bonds so that their amounts outstanding will “gradually” return to pre-pandemic levels of about Y2 trillion for CP and about Y3 trillion yen for corporate bonds.