–Ensuring Small Firms’ Health Also Important in Sustained Growth, Price Stability
By Max Sato
(MaceNews) – Bank of Japan board members stressed that substantial wage hikes must continue beyond his fiscal year and the bank’s yield curve control framework needs to become more flexible to achieve stable 2% inflation, according to the summary of opinions expressed at the bank’s July 27-28 meeting released Monday.
Some members also noted that there is still some time before Japan can bring about stable 2% inflation in a sustainable manner, thus the bank must maintain its basic monetary easing stance.
“The main reason why projected inflation for fiscal 2023 has deviated upward from the baseline scenario is that the cost-push from import prices has affected prices for longer than expected,” one member said. “That said, as signs of change have been seen in firms’ wage- and price-setting behavior, close monitoring is warranted on their effects on prices. Determining whether wage hikes will continue next year will be a key issue.”
Another member agreed: “The year-on-year rate of change in the CPI is likely to fall below the 2 percent level in the second half of fiscal 2023. In order for this rate to then rise again to 2 percent and continue to stay at that level in a stable manner, it is important that a trend in which wage growth surpasses the rate agreed in this year’s annual spring labor-management wage negotiations take hold.”
Upside and Downside Risk to Prices
There was an optimistic outlook toward 2% inflation. “The recent wage hikes and pass-through of cost increases by firms have a pent-up aspect, in that these moves had been suppressed for nearly three decades. Therefore, wages and selling prices could continue to rise at a pace that has not been seen in the past.
But at least one member was more cautious. “There has been a polarization between those firms that seek to raise wages and prices through initiatives and investment to increase value-added and those that stick with their strategy of low wages, low value-added, and low prices. It cannot yet be said that the former type of firm has become the mainstream.”
Some members referred to the importance of supporting small businesses.
“There is a long way to go to achieve inflation accompanied by wage increases,” one member said. “In order not to lose a golden opportunity to dispel the deflationary mindset, the Bank needs to gain a good grasp of the situation regarding reforms in economic and wage structures and make a careful assessment of economic activity and prices so that there will not be a waning of appetite for investment among small and medium-sized firms, whose borrowings had increased during the COVID-19 pandemic.”
Another one said, “It is important that regional financial institutions provide follow-up support to small and medium-sized firms in order to strengthen their management resources, such as through business succession, which encourages transformation among these firms. In addition, in order to stimulate growth expectations and change the deflationary mindset, it is important to
achieve growth in nominal GDP, as well as economic and wage structures in which nominal wages increase to a greater extent than do prices.”
At the July meeting, the BOJ policy board decided unanimously to maintain its monetary easing stance, keeping its zero to slightly negative interest rate targets along the yield curve as well as large asset purchases to continue seeking stable 2% inflation and support sustainable wage growth.
But at the same time, the board decided in an eight to one vote to make the bank’s existing reference range for the 10-year bond yield more flexible, basically keeping the range of minus 0.5% to plus 0.5%, but expanded its ultimate defense lines to minus 1.0% and plus 1.0% in market operations.
By providing “greater flexibility,” the bank hopes to allow a natural uptick in long-term interest rates that reflects economic recovery with substantial wage hikes and mitigate the negative impact of artificially suppressing interest rates, which has paralyzed bond market functions and could negatively affect other financial markets.
Greater Flexibility Needed for Continued Easing
The summary of the meeting showed several members called for “greater flexibility” in the conduct of the seven-year-old policy tool.
“Given that there are increasingly significant upside and downside risks to the outlook for prices, it is appropriate for the Bank to conduct yield curve control with greater flexibility in order to respond to these risks,” one member said.
Another one also said, “It is important to aim at keeping long-term interest rates stable at low levels in order to achieve the price stability target of 2 percent early. Until the likelihood of achieving the price stability target rises sufficiently, the Bank needs to maintain yield curve control while conducting it with greater flexibility.”
The board remains cautious about making a fundamental change to the yield curve control framework, which was adopted in September 2016. A negative interest rate for the overnight rate was introduced in January that year.
“As sustainable and stable achievement of the price stability target of 2 percent has not yet come in sight, there is still a significantly long way to go before revising the negative interest rate policy, and the framework of yield curve control needs to be maintained in line with the Bank’s commitment that it has announced with regard to such framework.
Under the current 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.
One member was even cautious about the timing of making the framework more flexible.
“The current price rises are no more than import inflation,” the member said. “In order to improve the momentum for wage hikes for small and medium-sized firms, where many of those employed in Japan work, it is important to enhance the earning power of these firms. It is more desirable to allow greater flexibility in the conduct of yield curve control after confirming a rise in their earning power.”
Board member Toyoaki Nakamura, a former Hitachi executive with finance and accounting experience, dissented, arguing that it would be better to confirm that firms’ earning power is rising in data, such as the Ministry of Finance’s quarterly business survey, before allowing “greater flexibility” in the conduct of the bank’s yield curve control.