–Momma Sees 20% Chance of BOJ Achieving Stable 2% Inflation in A Year, Up from Zero 6 to 12 Months Ago
–Momma: Cost-Push Inflation Prompting Wage Hikes Amid Labor Shortages
By Max Sato
TOKYO (MaceNews) – The Bank of Japan is focused on riding the wave of wage hikes to achieve stable 2% inflation by patiently maintaining its accommodative policy stance but it may move to start raising interest rates by year end, at the earliest, if the prospect for continued wage hikes emerges, Kazuo Momma, a former senior BOJ official, said.
The bank has become “more flexible” about how to respond to changes in the economic and financial climate since last December, when it was “obstinate” about sticking to its easing stance to bring about demand-pull 2% inflation beyond the ongoing supply-driven spike in consumer prices, Momma, executive economist at Mizuho Research and Technologies, told Mace News in a recent interview.
Momma was assistant governor from March 2013 until May 2016. Previously, he was the director-general of the Monetary Affairs Department and the chief economist at the bank.
“The problem with the Bank of Japan’s pursuing 2% inflation last year was that it forcefully contained the upward pressure on long-term interest rates that spilled over to Japan, which prompted the yen to depreciate rapidly from ¥115 to ¥150 to the dollar,” he said. “The public perception was that the BOJ was to blame for the yen’s fall by sticking to monetary easing for the sake of achieving its 2% inflation target.”
BOJ Rapped for ‘Stubborn’ Easing Policy Last Year
Critics at the time called for a more flexible 1% to 3% inflation target or making the target a long-term goal. Momma said essentially it is not an issue of whether 2% is a good target for Japan but that the BOJ was “too stubborn” about its mandate established in a joint statement with the government in January 2013 while many households and firms were struggling with surging food and energy prices amid the weak yen that pushed up import costs.
At its Dec. 19-20 meeting, the BOJ’s policy board decided unanimously to allow the yield on the 10-year Japanese government bonds to rise to 0.5% from the previous cap of 0.25% amid upward pressures arising from aggressive tightening by other major central banks. But at the same time, it also voted unanimously to maintain its basic monetary easing stance, keeping its zero to slightly negative interest rate targets along the yield curve and large asset purchases.
“Since then, there has been no criticism of the BOJ policy and there is not much debate calling for changing the 2% target,” Momma said, adding that there is no move to review the central bank’s policy coordination agreement with the government that was signed in January 2013 as part of a reflationary Abenomics policy mix of aggressive monetary easing with a clear 2% inflation target, flexible fiscal spending, and growth strategies.
Haruhiko Kuroda, who led the bank’s ‘unprecedented’ large-scale monetary easing campaign for 10 years until his second five-year term ended on April 8, called the bank’s December decision to allow long-term interest rates to trade in a wider range an “adjustment” and said it should not be termed as a rate hike.
At its latest meeting on April 27-28, the BOJ board under the new governor, Kazuo Ueda, decided unanimously to maintain its monetary easing stance, keeping its zero to slightly negative interest rate targets along the yield curve and large asset purchases to continue seeking stable 2% inflation and support sustainable wage growth.
The board said in its statement that it will patiently continue with monetary easing “while nimbly responding to developments in economic activity and prices as well as financial conditions,” indicating that it could adjust its yield curve control framework to allow slightly higher interest rates.
New and Reformed BOJ Toward Rate Hike
“The bank added the words ‘nimbly responding’ at its April statement,” Momma said. “It is like a letter of apology saying we won’t act like we did last year. It is a reformed BOJ, different from before.”
“I think Mr. Ueda will respond swiftly if something similar to what we saw last year happens by saying, ‘The yen’s fall is troubling, so we will raise interest rates slightly.’”
In his book “The Invisible Truth about the Japanese Economy: Is there an Exit from Low Growth and Low Interest Rates?” published last September, Momma said the BOJ is unlikely to achieve its 2% price stability target in the foreseeable future.
Now he believes there is a 20% chance that the bank can achieve the target within a year.
Inflation Dynamics Has Changed
“The dynamics surrounding inflation have changed drastically in the past six to 12 months as companies are raising wages,” Momma said. “They have to raise wages to secure employees, not just quality workers but anybody. There are labor shortages in many industries. They cannot get enough people even when they raise hourly wages. We haven’t seen anything like this for 30 years.”
The reopening of the economy without strict Covid public health rules and border control has boosted domestic demand for traveling and dining out as well as spending by an influx of visitors from overseas, causing acute labor shortages at hotels and restaurants and prompting price hikes.
But Momma warned that the recent spike to above 4% in the annual consumer inflation rate could shrink below 2% down the road. “We are still in the process of reflecting high import costs,” he said. “There is a possibility that prices will slip back when the process is finished.”
“I think the possibility of the BOJ achieving 2% inflation is about 20% at most. It is a big change but it is still a low chance,” Momma said.
The board projected in April that consumer inflation will ease to 1.8%, below its 2% target, in fiscal 2023 ending in March 2024 after a temporary spike to 3% in fiscal 2022, which was caused by last year’s high import and producer costs arising from Russia’s invasion of Ukraine and prolonged supply constraints. The board’s inflation projection for fiscal 2024 is 2.0% but its forecast for 2025 is 1.6%. This indicates that whether the bank can win its drawn-out battle to reflate the economy will remain uncertain.
BOJ Rate Hike Linked to Wage Hike Prospect
The BOJ is likely to start raising rates when there is a prospect for sustained wage hikes, Momma said.
Does it mean the bank will have to wait until the final results of labor-management negotiations among major firms for fiscal 2024 will be released in the spring next year?
Tentative results of annual labor talks released by mid-April showed that Japanese workers at large firms were expected to receive an average 3.80% increase in total wages, a 30-year high, in fiscal 2023 starting on April 1, up from 2.14% in the initial estimate for fiscal 2022. But excluding seniority-based rises that are already in contracts, the preliminary estimate for the average base wage hike is lower at 2.33%, which is still up from 0.50% seen a year ago.
“The earliest timing (for a rate hike) is at the end of this year,” Momma predicted. “By monitoring the price development and corporate profits at the time, the BOJ can move to raise interest rates if there is a good prospect that 2024 spring labor talks can produce substantial wage hikes.”
“But that’s the earliest case and its possibility is low,” he said. “The most likely timing for allowing a rate hike, if any, is the next spring (around April) or summer (around July).”
Lifting Long-Term Rate First
Momma said the BOJ is likely to raise the long-term interest rate target initially and may increase both the long- and short-term rates in a second hike later.
“There can be various methods on the menu. After a couple of hikes, they may abolish the yield curve control framework,” he said.
The BOJ has maintained the yield curve control framework that 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.
Under the 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.
BOJ Policy Tool after Yield Curve Control
The BOJ won’t need the YCC eventually, as it raises the zero interest rate target to 0.25%, then 0.5%, 1.0%, and until it will be consistent with the market rate, Momma said.
“But they cannot remove it at this point as it would be regarded as a rate hike,” he said.
It is still uncertain how the BOJ will reduce its asset purchases in the process of exiting from years of monetary easing.
“When the BOJ is about to achieve the 2% inflation target, it may not have to increase net purchases of JGBs,” Momma said. “On the other hand, if the YCC is about to go, the bank will also lose the standard for JGB purchases. They will have to set a new rule. The easiest way is to keep the balance of its JGB stock by reinvesting the maturing amounts.”
Costs and Benefits of Pursuing 2% Inflation Target
The BOJ board under Governor Ueda decided in April that it will spend the next 12 to 18 months conducting a “broad-perspective review” of the costs and benefits of the bank’s various monetary easing measures implemented in the past 25 years. Achieving price stability “has been a challenge” since late 1990s when Japan plunged into deflation, it said.
The question remains as to whether the 2% inflation target is suitable for Japan and how it can anchor it.
The BOJ’s easy policy commitment originates in the “Joint Statement of the Government and the Bank of Japan on Overcoming Deflation and Achieving Sustainable Economic Growth” issued on Jan. 22, 2013 at the start of the then Prime Minister Shinzo Abe’s reflationary policy mix of aggressive monetary easing, flexible fiscal spending and deregulation dubbed Abenomics.
The conservative blueblood politician’s ambition was to rewrite Japan’s post-war pacifist constitution but he gained popularity during his 2012 election campaign by promoting the idea of reflating the economy with massive cash injections into the financial system and boosting exporter profits, and thus overall stock market sentiment, by guiding the yen weaker.
Meaning of 2% Target
“What was important was not to achieve 2% but for the BOJ to make the best effort under the 2% target,” Momma recalled. “By doing so, it was meant to give hopes to the society that things would change, or make other growth strategies easier to achieve as a lubricant.”
“After stepping down in 2020, the late Prime Minister Abe said employment had increased and it was not deflation any longer, so the purpose of the 2% inflation target had been achieved,” he said.
Halfway through the BOJ’s bid to boost inflation, voters lost interest and so did ruling party politicians including Abe. They stopped calling for 2% inflation but Kuroda was stuck with his promise to achieve stable 2% inflation.
Momma said the BOJ’s experiment of flooding the financial market with cash in the past decade showed that the amount of money is not the key to changing people’s mindsets and reflating the economy.
“It is true that the government bond market is not functioning. It is a problem for bond traders but not for the general public. Far more important for them is deflation is over and more jobs are created,” he said. “In my view, the 2% inflation target is not so beneficial but not causing much harm, either. It contributed a little to cheering up the mood and has made relationship between the BOJ and the government smoother somehow.”
Momma said it is unknown whether countries where prices keep rising 2% every year are better than those where prices are not rising much.
Then what is so important to seek 2% inflation instead of lower price rises?
“It does not matter so much. There is no big difference among zero, 1% or 2% inflation,” Momma said. “It would be problematic if prices were rising 5% or 10% every year, or falling 20% to 30%.”
“Before the pandemic, inflation in the U.S. was 2% and it was zero in Japan. If you ask me which is better, I would say, whichever.”
Symbol of Seeking Price Stability
Momma believes there is no significant meaning to a 2% inflation target, which has become a standard for major central banks. “It works as a symbol for central banks seeking to achieve price stability,” he said.
“The Fed has been targeting 2%. If it changes it to 3%, then people would think that it is not serious about prices stability any longer,” he explained.
“There is a risk to changing the target,” Momma said. “Unless there is a significant inconvenience, we will continue working with 2% in the next 50 to 100 years in Japan, too.”
Since taking office in 2021, Prime Minister Fumio Kishida has been seeking to guide a “shift from policies based on neoliberalism,” referring to market-oriented reforms that have been criticized for creating income inequality, under his “new capitalism” to be introduced in a “medium- to long-term” approach.
Kishida is looking for a good balance between wealth distribution and economic growth.
“The mood for seeking wage hikes has been more prevalent in the past two to three years because distribution means higher wages,” Momma said, adding that the current administration is trying to encourage investment in human resources and help people learn new skills to get better jobs.
But some young people have already been focused on building careers by joining large firms, learn skills and look for other opportunities or start their own business, he said.
It is not clear whether there is a shift in power between capital and labor but in the absence of a sufficient social safety net, there has emerged a gap between people with abilities to move up and earn more and those without, Momma said, adding, “The gap is going to widen more and more, particularly among young people.”
—
Contact this reporter: max@macenews.com
Content may appear first or exclusively on the Mace News premium service. For real-time delivery in entirety contact tony@macenews.com. Twitter headlines @macenewsmacro