–Board Members Also Argue Monetary Policy Should Not Be Linked to Forex
By Max Sato
(MaceNews) – Bank of Japan board members agreed that the current uptick in consumer inflation toward the bank’s 2% target would be temporary as the base effect of high food and energy prices is likely to fade next year, with a positive view looking at a spillover to wage hikes against a negative outlook toward a setback in growth and inflation expectations, according to the summary of opinions expressed at the bank’s April 27-28 meeting.
The summary, which was released Thursday, also showed the board also stuck to the principle shared among major central banks that policymakers must target price stability, not exchange rates themselves.
On economic developments, one opinion continues to support what the current and past BOJ governors have said about the net positive effect of the weak yen on the overall Japanese economy by boosting repatriated dollar profits, although it does not push up export volumes as it used to amid the globalization of business operations.
“The yen’s depreciation works positively in the current situation where the output gap and the unemployment gap are still large in absolute terms and underlying inflation is extremely low,” the summary said.
Governor Haruhiko Kuroda told a post-meeting news conference on April 28 that an excessively rapid movement in exchange rates would increase uncertainty and have a negative impact on the economy, although he had not changed his assessment that “the depreciation of the yen is positive overall.”
On prices, the summary showed what seems to be a majority outlook: “The year-on-year rate of change in the consumer price index (CPI, all items less fresh food) is likely to increase temporarily to around 2 percent — due to the impact of a significant rise in energy prices — in fiscal 2022, when the effects of a reduction in mobile phone charges dissipate. Thereafter, however, the rate of increase is expected to decelerate because the contribution of the rise in energy prices to the CPI is likely to wane.”
But there is always a cautious view: “Although the possibility of the inflation rate reaching 2 percent has increased, the rise in inflation is due to higher import prices and therefore will be only temporary. Achieving the price stability target in a stable manner is difficult given developments in the output gap and inflation expectations.”
Along Kuroda’s cautiously optimistic line, at least one member said: “The underlying inflation rate is likely to rise moderately due to increasing moves by firms to pass on a surge in commodity prices to retail prices, changes in firms’ and households’ mindset regarding prices, and a possible strengthening of upward pressure on wages amid intensifying labor shortage.”
Among more cautious voices: “The recovery in Japan’s economy depends on the course of Covid-19, but there remains a risk that downward pressure will be exerted on prices if medium- to long-term inflation expectations, wage inflation, and medium- to long-term growth expectations do not rise sufficiently while ‘standby’ funds are not utilized.”
One view stressed the need to stick to the textbook policy line when it comes to coping with rapid forex movements: “In the conduct of monetary policy, the effects that movements in commodity prices or exchange rates have on economic activity and prices, rather than the movements themselves, warrant consideration. It is necessary that the bank maintain monetary easing to achieve the price stability target in a stable and sustainable manner.”
Another voice supports the view: “While communication to the public on the relationship between monetary policy and foreign exchange rates is important, one reason for the yen’s recent depreciation is that economic conditions in Japan have been different from those in the United States and Europe, and it is not appropriate that the bank change its policy with the aim of controlling foreign exchange rates.”
The board is also looking ahead toward its task after Kuroda’s second five-year term ends in April 2023: “Achieving the price stability target of 2 percent during the projection period is difficult. In this situation, it is necessary for the bank to carefully outline the significance of the target and the path toward its achievement, and continue to bear in mind that, as monetary easing becomes further prolonged, its sustainability will be increasingly important.”
At its April 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.
BOJ policymakers once again made it clear that they are pursuing the path toward boosting inflation past 2% and anchoring it around that level by injecting cash into the financial system, despite concerns that monetary easing at the time of a shift to tightening by other major central banks could erode the value of the yen further and push up import costs of food and energy.
For fiscal 2022 ending in March 2023, the median forecast for the core consumer price index (excluding fresh food) by the board is 1.9%, up sharply from 1.1% in January, according to the bank’s quarterly Outlook Report issued on April 28. The core inflation forecast for fiscal 2023 is 1.1%, unchanged from January. The board’s inflation projection for fiscal 2024 was also 1.1%, its first estimate.
In fiscal 2021, the core CPI edged up 0.1% from fiscal 2020, when the key index fell 0.4%, following three years of increase. The downward pressure from mobile phone fee discounts was offset by sharp gains in food, utilities and fuels as well as markups in property insurance premiums and fading effects of subsidized hotel fee discounts in parts of fiscal 2020.