By Max Sato
The summary, a preview of the minutes to be issued on Dec. 23, also showed board members called for a careful watch on the impact of aggressive tightening by other major central banks on global financial markets, while some reminded the need to continue discussing how the bank’s own exit strategies in the future would affect markets, with an eye on the side effects of prolonged easing.
During debate on monetary policy, at least one member said, “Firms’ financial
positions have remained on an improving trend and the environment for external funding has been favorable on the whole. Under these circumstances, it is appropriate for the bank to maintain the current guidelines for market operations and asset purchases, as well as its current stance regarding the future conduct of monetary policy.”
“For the time being, while closely monitoring the impact of COVID-19, the bank should support financing, mainly of firms, and maintain stability in financial markets, and should not hesitate to take additional easing measures if necessary,” the summary said, repeating the recent official policy statement. “It is appropriate for the bank to maintain the forward guidance for policy rates that was decided at the previous MPM (monetary policy meeting).”
“In achieving the price stability target, it is important that wages increase in a sustainable and stable manner,” one member said. Another added: “In order to achieve the price stability target while increasing the likelihood of wage inflation being realized, it is appropriate for the bank to continue with the current monetary easing.”
There was also caution against shifting to tightening: “In achieving the price stability target in a sustainable and stable manner, it is undesirable to make premature changes to monetary policy because they have a risk of disrupting the formation of a virtuous cycle between prices and wages.”
On the recent market fluctuations, one member said, “Japan’s financial system has maintained stability on the whole. However, continued vigilance is required against the impact of a tightening of global financial conditions.”
Another one noted: “Foreign exchange rates should reflect economic fundamentals. It is important for the bank to communicate with market participants in line with this thinking to, for example, gain public understanding of its monetary policy conduct.” BOJ officials have said their policy stance is not based on forex rates.
Looking ahead, one member said, “Although there is no need to immediately change monetary policy, it is necessary to examine the impact of high prices on household behavior and wages humbly and without any preconceptions while paying attention to the side effects of monetary easing. The summary didn’t mention but lender margins have been squeezed and the bond market pricing mechanism distorted under the BOJ’s zero to negative interest rate policy.
“It is also important to continue to examine how future exit strategies will affect the market and whether market participants will be well prepared for them,” another member said.
At the October meeting, the board decided unanimously to maintain its zero to slightly negative interest rate targets along the yield curve and large asset purchases, as expected, to support full economic recovery and anchor inflation around its 2% price stability target. It also projected that downside risks to growth and upside risks to inflation will last longer than previously forecast.
In its quarterly Outlook Report, the board revised up its forecast for inflation for the next few years in the face of elevated costs for energy, food and durable goods. While lowering its projection for economic growth for the current and next fiscal years, the board became more upbeat about GDP growth in fiscal 2024.