–Board Members See Uncertainty from China’s Covid Policy, Other Risks
–Members Note Pickup in Service Sector on Japan’s Eased Covid Rules
By Max Sato
(MaceNews) – Bank of Japan board members argued that continued monetary easing is necessary to anchor 2% inflation in a “stable” manner, and to achieve that goal, fiscal support and labor market reform are also essential to raise the economy’s growth potential and promote wage hikes, according to the summary of opinions expressed at the bank’s June 16-17 meeting released Monday.
The summary had only one specific reference to the recent depreciation of the yen, which makes Japan’s import costs higher, while the positive impact of the weak yen on export volumes is limited as the strong yen and trade conflicts in the past prompted firms to move factories overseas.
“A rapid depreciation of the yen has a negative impact on Japan’s economy as it heightens uncertainties about the future and therefore makes it difficult for firms to formulate their business plans,” one member said, echoing the official line used by Governor Haruhiko Kuroda in his recent remarks.
As the dollar topped Y136, hitting the highest level in about 24 years, Kuroda has stopped saying the net effect of the weak yen on the overall Japanese economy is “positive,” which was his assessment in late April when the yen was at around Y130 to the dollar and its decline was more gradual than in recent trading.
The debate among board members at the June meeting appeared to have focused on the sustainability of the recent jump in consumer prices to around the bank’s 2% inflation target, and thus the need for continued monetary easing.
“Although the range of items increasing in price has broadened due to the rise in commodity prices and movements in foreign exchange rates, it cannot be said that the price stability target has been achieved amid a virtuous cycle,” one member said. “It is therefore appropriate for the bank to maintain the current monetary policy.”
Another member pointed out that “it has been structurally difficult for wages in Japan to rise because labor-management negotiations have long prioritized maintaining employment over raising wages.” The same member said, “In order to achieve wage increases despite these circumstances, it is necessary for the bank to persistently continue with monetary easing and thereby support the economy.”
There was an opinion that monetary easing alone could not vitalize the economy: “In order to close Japan’s negative output gap and increase income and employment, it is necessary for the bank to aim at achieving a high-pressure economy by stimulating the economy, in coordination with the government’s fiscal and other policies.”
To achieve a virtuous cycle in which income and prices rise in a stable and sustainable manner, firms’ efforts to improve productivity and raise wages are important, another member said. “Also key to achieving the virtuous cycle are labor market reforms that lead to an increase in job changes aimed at increasing income, the growth of startups that create new value, and the promotion of stable asset formation by households,” the member said.
Board members also discussed the fading impact of the pandemic on consumer spending while warning about the prolonged negative impact of Covid lockdowns in China that have exacerbated global supply bottlenecks.
Several members mentioned that the services sector in the Japanese economy is picking up as the government eases public health restrictions in late March, with one noting that “the degree of decline in the economy in response to increases in the number of Covid-19 cases has become smaller” as people have got used to living with the pandemic.
There are expectations for more spending on leisure in the summer, but another member is concerned as to “whether the negative pandemic of the pandemic will be protracted, mainly in the face-to-face services industry.”
Board members warned about downside risks to Japan’s gradual pickup from the pandemic-caused slump.
“Downward pressure on exports and production has been greater than was projected in the April Outlook for Economic Activity and Prices due to supply-side constraints reflecting lockdowns in China,” one member said. “Moreover, the possibility of such downward pressure being prolonged is of concern.”
Another member also cautioned: “Although lockdowns in Shanghai have been lifted, it will require time for economic activity in the area to normalize, and there is concern about the possibility of a slowdown in economic growth in China and of prolonged supply-side constraints on a global basis.”
“There are high uncertainties over the outlook for Japan’s economy, including the course of Covid-19 in China in particular and its impact, the situation surrounding Ukraine, and the impact of global inflation,” a different member said.
At its June meeting, the nine-member board decided, as expected, in an 8-to-1 vote to maintain its current monetary easing stance under the yield curve control framework it adopted in September 2016, vowing to keep zero to negative interest rates “as long as necessary” to achieve its 2% inflation target in a stable manner.
To keep speculative market forces from pushing the long-term bond yield beyond the its defense line, the bank will continue offering to buy 10-year Japanese government bonds at a fixed rate of 0.25 percent every business day through market operations “unless it is highly likely that no bids will be submitted.” The board decided to introduce this new market operation at its last meeting in April.
The bank has been guiding the 10-year JGB yield around zero to maximize the impact of monetary easing but it allows market rates to fluctuate between minus 0.25% to plus 0.25%.
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Contact this reporter: max@macenews.com
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