By Max Sato
(MaceNews) – Bank of Japan Governor Haruhiko Kuroda made it clear once again that the bank’s policymakers are “not considering raising interest rates at all” given their latest outlook that domestic inflation is unlikely to be anchored around its 2% target in the next few years.
He told a post-meeting news conference that the rapid depreciation of the yen makes it hard for businesses to formulate plans, and thus is “undesirable,” repeating his recent comments.
Asked if the bank could estimate how much a rate hike would push down economic growth, Kuroda said, “If we were to assess what impact an interest rate hike would have on the economy at this stage, it would probably be much bigger than economic models suggest. We are not at all considering raising interest rates under the yield curve control framework, or changing the range of plus 0.25% to minus 0.25%.”
The bank has been guiding the yield on 10-year Japanese government bonds around zero to maximize the impact of monetary easing but it allows market rates to fluctuate between minus 0.25% and plus 0.25%.
At its latest two-day policy meeting that ended on Thursday, the BOJ board decided to maintain its super-low interest rate targets along the yield curve and large asset purchases, as expected, to help the economy fully recovery from the pandemic-caused slump and anchor inflation around its stable 2% target.
To keep speculative market forces from pushing the long-term bond yield above its defense line, the bank also said it will continue offering to buy 10-year Japanese government bonds at a fixed rate of 0.25 percent every business day 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.
Kuroda said the upward pressure on prices is expected to ease next year even if firms have passed higher costs onto customers because the sharp increase in energy and commodities prices is forecast to decelerate gradually based on the recent price action in the futures markets.
Base wages have been rising in recent years but not fast enough to support full recovery of consumption to pre-pandemic levels amid surging food and energy prices, which is why the BOJ must maintain its easing stance, the governor said.
The behavior and mindset based on the assumption that prices and wages will not increase easily are deeply entrenched in Japan, and it requires some time to convert it, he added.
Asked if the central bank should raise the salaries of its own employees to help change the deflationary mindset, Kuroda said, “The wages for civil servants must follow the wage patterns in the private sector. It would be difficult to raise the wages at the BOJ just because private-sector wages are slow to rise, judging from this wage-setting mechanism.”
The BOJ board is counting on a “virtuous cycle from income to spending” – in which improvement in corporate profits leads to a rise in business fixed investment and pushes up income, and thus consumer spending – will intensify gradually.
Kuroda’s comments and the BOJ’s latest outlook indicate that the bank is likely to maintain its easing stance at least until the governor’s second five-year term ends next April, and possibly for a few more years unless the government and the central bank agree to change the 2% inflation target they set in early 2013.
The BOJ has also been saying it will continue expanding the monetary base
until the year-on-year rate of increase in the core consumer price index (excluding fresh food) “exceeds 2% and stays above the target in a stable manner.”
For fiscal 2022 ending in March 2023, the median forecast for the core CPI by the board was 2.4%, up from 1.9% projected in April and 1.1% in January.
But even though the core CPI inflation forecast for fiscal 2023 was revised up to 1.4% from 1.1% projected in both April and January, it would be still far from the state of being anchored about 2%. The board’s inflation projection for fiscal 2024 was 1.3%, slightly up from 1.1% in April, its first estimate.
Asked about concerns among investors that the US economy may slip into recession as the central bank is raising rates to fight inflation, Kuroda replied,
“We don’t have to think about a recession or stagflation at this point.”
“Based on the forecasts by international organizations and our international department, we can see 3% growth in the global economy,” he said. “I think there is a risk but I don’t think we have to assume a global recession.”
Kuroda acknowledged that Japanese financial institutions have incurred unrealized losses in their US treasuries holdings or seen unrealized gains shrink as US interest rates have risen, but also said that “the extent (of the losses) is limited as far as we can see.”
“I don’t think there will be concerns about our financial system stability,” he said. “But I do think they (financial institutions) should continue to ensure risk management as regional banks are also increasing holdings of overseas stocks and investment funds.”