— BOJ Members Also Debate Upside, Downside Risks Amid Uncertain Outlook
By Max Sato
(MaceNews) – Bank of Japan board members called for a continued accommodative monetary policy stance, saying the situation in Japan is different from other major economies where central banks are trying to control high inflation, the minutes of the bank’s Dec. 16-17 meeting released Friday showed.
The board also discussed both upside and downside risks to economic growth and inflation as the outlook remained highly uncertain amid a spike in coronavirus infections caused by the Omicron variant.
At the meeting, the board unanimously decided to end parts of the bank’s anti-Covid special financing program aimed at supporting large firms, whose financial conditions have improved, while extending its feature of helping hard-hit small businesses, particularly those in the service sector.
As expected, the nine-member board also decided 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.
Bracing For More Pandemic Shocks
“One member expressed the view that, if the economic situation changed significantly due to the course of the pandemic, it might become necessary for the bank to make policy responses that went beyond facilitating corporate financing,” the minutes said.
“The member continued that the bank should clearly explain to the public that, if this became the case, it would not hesitate to take policy measures while cooperating with the government.”
A different member expressed the recognition that the Special Program was a measure to respond to Covid-19, and it basically should be completed when the impact of Covid-19 waned.
“This member then said that, even when the bank completed the whole program in the future, this would not mean in any sense a reduction in monetary accommodation under Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control; instead, it would simply mean that the bank had finished with its responses to COVID-19.”
Inflation Not Anchored Yet
One member argued that the inflation level currently being seen in Japan was largely due to rises in prices of crude oil and commodities, “and that medium- to long-term inflation expectations had not been anchored to the price stability target of 2 percent.”
“This member then pointed out that adjustment of monetary easing measures at this juncture was premature, as it could hinder the economic recovery from the pandemic and bring about an economic downturn and a decline in prices.”
A different member urged the bank to “persistently continue with the current accommodative monetary policy stance” given that price developments in Japan differed significantly from those in the United States, the minutes said.
“Meanwhile, one member expressed the view that the bank should strengthen its monetary easing stance with a view to improving the output gap and inflation expectations, and thereby achieve an economic recovery and the price stability target early.”
A different member noted Japan needs more than monetary easing to establish stable 2 percent inflation, saying that, “It was necessary to have an economic structure where firms’ new demand for funds for investment purposes was generated and the flow of funds increased, and that it was important to carefully monitor the initiatives taken by economic entities in realizing this structure.”
Watching for Both Upside and Downside Risks
Board members shared the view that “attention was also warranted on the risk that the effects of supply-side constraints would be amplified or prolonged,” the minutes said.
Looking ahead throughout fiscal 2022 starting in April, one member noted that the number of factors that could bring about an upward revision – namely, the effects of the government’s economic measures and signs of a recovery in production from the decline brought about by supply-side constraints — was increasing.
A few members mentioned a possible upside risk, saying, “If it turned out that the Omicron variant was attenuated and more people gained a sense of assurance from, for example, the rollout of booster shots and an oral antiviral medicine, there was also a risk that pent-up demand would clearly materialize and the economy would grow faster than expected.”
On the downside, one member pointed out that corporate profits could be negatively affected not only by the deterioration in the terms of trade but also by logistics disruptions and prolonged supply-side constraints.
“This member continued that, if cost increases were not fully passed on to selling prices under the circumstances, there was an increasing risk that profits would not be distributed to capital or labor smoothly.”
Also on the downside, a different member pointed to the risk that a deceleration in overseas economies would lead to a sluggish recovery of the domestic economy.
One member pointed to both upside and downside risks to inflation, saying, “… in Japan, firms had maintained their employees even during COVID-19 and thus a surge in wages, as seen in the United States, was unlikely to occur; however, there was a certain degree of risk that prices, together with the growth rate, would rise higher than expected.”
A different member referred to the bank’s view that risks to prices were “skewed to the downside” during the pandemic due to Japan specific factors, such as low tolerance of price rises and the fact that wages do not increase easily.
But this member called for reexamining whether the current assessment would remain appropriate, considering, the recent rises in inflation expectations and raw material costs.
Contact this reporter: max@macenews.com
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