–Members Agree Easing Should Continue to Support Wage Hikes but Some Also Call for Review of Easing Tools
By Max Sato
Noting uncertainty over the inflation outlook, board members agreed that the bank should continue with easing patiently to support wage increases, calling for flexible conduct of monetary policy, but also noted the need to continue debating the costs and benefits of the yield curve control framework.
Among positive views on inflation, one member said, “Some aspects of firms’ behavior have begun to shift more toward raising wages and prices.”
“A positive wage-setting stance has started to spread among firms, and they have maintained their appetite for business fixed investment,” another member agreed. “Given this, a virtuous cycle that leads to inflation accompanied by wage increases seems to have started to emerge.”
A third member said that “it is quite possible that the wage growth rate next year will exceed that for this year” because recent market projections of the inflation rate are higher than those in the previous year and the government plans to raise minimum wages further.
There were also cautious views. One member noted that the year-on-year rate of increase in goods prices has finally started to decelerate, following a decline in import prices. “Given this, it seems highly likely that the inflation rate will slow,” the member predicted.
“In terms of sustainability of price hikes, an important aspect is whether firms can continue with their price-setting behavior, such as that observed recently, even as pent-up demand wanes,” another member said.
On the bank’s policy stance, one member said, “Sustainable and stable achievement of the price stability target, accompanied by wage increases, has not yet come in sight, and thus the bank needs to patiently continue with monetary easing under yield curve control.”
“It is necessary for the bank to keep supporting the momentum for wage hikes through continuation of monetary easing,” another one said.
There was a view that seemed to be in response to market expectations for an imminent shift in policy stance, which said, “There are high uncertainties over the timing of and specific measures for policy revision, since this depends on developments in economic activity and prices and the outlook for them at each point in time. At the moment, the Bank is not in a phase to decide on any details.”
Another member noted, “Even if the bank were to terminate its negative interest rate policy, this can be considered as continuation of monetary easing if real interest rates remain negative. It is important for the bank to carefully provide communication on this.”
Among voices calling for reviewing the current policy stance, one said, “Although it is desirable for the Bank to maintain accommodative monetary easing for the time being, in the future phase of an exit from the current monetary policy, it should consider not only the treatment of yield curve control but also whether it needs to continue purchasing assets other than Japanese government bonds (JGBs).”
Another one said, “Although some improvements have been observed in market functioning as a result of the bank allowing greater flexibility in the conduct of yield curve control, the risk of market instability and the side effects on market functioning have remained even after doing so.
Developments since the introduction of yield curve control show that it is at a stage where it has already played many role.”
At the September 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.
Governor Kazuo Ueda told a post-meeting news conference on Sept. 22 that the bank’s policymakers “cannot possibly pre-determine the timing of policy change or specific responses,” reminding that it may take some more time before clear indications for continued substantial wage hikes and stable 2% inflation emerge. He repeated that Japan’s growth and inflation outlook remains highly uncertain.
Ueda also said the risk of under-easing is still greater than over-easing because Japan has experienced years of deflation and low inflation.
At its previous meeting in July, 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. The July vote on the overall easing stance was unanimous.
By providing “greater flexibility” to its market operations, the bank hopes to avoid being forced to abandon the yield curve control policy framework when long-term interest rates come under persistent upward pressures. It also 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.
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.
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.