By Max Sato
(MaceNews) – The latest message from Bank of Japan Governor Haruhiko Kuroda points to the bank’s long-term commitment to maintaining its monetary easing stance despite a rush of interest rate hikes by other central banks, as cyclical and structural issues are keeping Japan’s domestic demand sluggish and consumer prices relatively low.
In his speech on June 6, Kuroda stressed that “the bank will take a strong stance on continuing with monetary easing, in that it will provide a macroeconomic environment where wages are likely to increase so that the rise in inflation expectations and changes in the tolerance of price rises — which have started to be seen recently — will lead to sustained inflation.”
The governor listed three reasons to justify the bank’s easing stance.
First, Japan’s economy has not fully recovered from the pandemic-caused slump, with its real GDP 2.7 percent below the pre-pandemic level seen in 2019 while the US economy is 3.7 percent above its 2019 level and the Eurozone exceeded its own pre-pandemic level by 0.6 percent, all in the first quarter.
Second, being a net commodity importer, Japan has been under downward pressure from an outflow of income as energy and commodities markets are surging. In contrast, the U.S. produces most of its resources, and thus a rise in commodity prices does not necessarily lead directly to an outflow of income.
Third, the bank needs to achieve its nine-year-old 2% inflation target “in a sustainable and stable manner.” The BOJ board has projected inflation will average just under 2% in fiscal 2022 but will slip back to around 1% in the next fiscal year as the impact of surging commodities prices fades.
Kuroda blames the bank’s failure to anchor 2% inflation even after years of massive asset purchases and keeping super-low interest rates on the fact that the “zero percent anchoring” of inflation expectations — or “zero-inflation norm” — has been “extremely persistent” in Japan.
Long-term employment practices of full-time employees basically have been maintained in Japan’s internal labor markets, which is allowing the labor market slack to remain and wage increases to be constrained even during economic booms as a result of securing employment during recessions, Kuroda explained.
BOJ Chief in Hot Water
Kuroda is a theorist, relying on macroeconomic analysis, but at the same time, he is also trying to capture early signs of any changes to the mindset among households and businesses in surveys and anecdotal evidence.
Last week, he said something that BOJ board members had been saying at recent meetings as shown in the minutes: People may be accepting the reality that prices have to go up if producer costs are skyrocketing.
But the governor could have been more careful about stepping on a political landmine, particularly ahead of upper house elections next month and at a time when more people are feeling the pain of rising costs of daily necessities, with some becoming jobless and homeless during the pandemic.
Kuroda withdrew his comments and apologized last week after saying in his June 6 speech that “Japanese households’ tolerance of price rises has been increasing” probably due to “forced savings” during the pandemic. The comments came under fire in social media. Opposition party lawmakers criticized him in parliamentary debates, calling him ‘careless’ and his choice of data ‘inappropriate.’
Kuroda used a survey conducted by Tsutomu Watanabe, economics professor at the University of Tokyo, who is known for his method of detecting early signs of consumer inflation changes. He surveys households in five countries including Japan and collects their answers to the question as to what they will do when the price of a product that they always buy goes up by 10% at the supermarkets that they frequent.
In the previous survey conducted last August, more than half of Japanese households answered that they would deal with the price increase by switching to a different supermarket. The results for Japan were markedly different from those for Europe and the U.S., where more than half of the respondents answered that they would accept the 10% price increase in the product that they always buy and continue to buy the same amount of it at the same supermarket.
The latest survey conducted this April, however, reveals changes in the results for Japan. The number of Japanese respondents who said they would deal with the price increase by switching to a different supermarket was down significantly, and more than half, as in Europe and the U.S., answered that they would accept the price increase and continue to buy the same amount at the same supermarket.
“While the results should be interpreted with considerable latitude, one hypothesis drawn from them is that ‘forced savings’ accumulated as a result of restrictions during the pandemic may have led to improvement in households’ tolerance of price rises,” Kuroda said.
Stuck in 2013 Joint Statement
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.
Masaaki Shirakawa, Kuroda’s predecessor, accepted Abe’s demand to set a clear 2% inflation target in exchange for the central bank’s independence of political influences. Abe then picked Kuroda, a former top Ministry of Finance policymaker, who agreed with Abe’s reflationary policy mix, cut short his tenure as president of the Asian Development Bank and returned to Tokyo.
Abe took office in December 2012 after bringing his conservative Liberal Democratic Party back to power in a landslide lower house election win with campaign promises to revitalize the economy and boost national confidence. He resigned in September 2020 in light of recurring ulcerative colitis, which had ended his first, brief premiership in 2007, but continues to influence LDP policymaking as the head of the largest faction in the ruling party.
Abe used the BOJ and Kuroda to keep the yen weak and deliver on some of his 2012 campaign promises to “correct the high yen” and “beat deflation.” Super-low borrowing costs are also helping the government keep issuing bonds to finance a series of economic stimulus packages.
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.
Now Kuroda is still stuck with his promise to achieve stable 2% inflation, even though it is unlikely to happen during his second five-year term that ends in April 2023.
Critics say Abe is hijacking the economic and fiscal policy of Prime Minister Fumio Kishida, who is seeking to transform the economy into “new capitalism” from the neoliberalism approach under Abe, with more focus on wealth distribution. Media reports said Kishida’s policy targets including seeking fiscal consolidation have been watered down as Abe pressured some LDP lawmakers into keeping the tone of Abenomics’ large fiscal spending.
Contact this reporter: max@macenews.com
Content may appear first or exclusively on the Mace News premium service. For real-time delivery, contact tony@macenews.com. Twitter headlines @macenewsmacro.