By Max Sato
(MaceNews) – Bank of Japan board members debated upside risks to inflation without substantial wage growth, which could be made worse by the lingering drag from the pandemic, according to the summary of opinions expressed at the bank’s Sept. 21-22 meeting released Monday.
The summary, a preview of the minutes to be issued on Nov. 2, also showed
board members agreed that while the impact of Covid-19 is easing, the BOJ needs to support funding among small businesses. They also confirmed that the bank must maintain its easing stance to support the economy’s full recovery from the pandemic-caused downturn.
One member looked at the positive side of the weak yen, possibly referring to boosting exporters’ repatriated profits, saying, “While the yen’s depreciation leads to price hikes in items such as imported products and food in the short run, it also has an effect of pushing up domestic economic activity in the medium
to long run.” The member continued: “On this point, such depreciation is different from energy price rises, which only have a negative impact of increasing costs.”
Another member discussed ways to take advantage of the weak yen: “The key to augmenting the advantages of the yen’s depreciation are an expansion in inbound
tourism consumption, an increased emphasis on domestic sites in investment for growth areas, and enhancement of small and medium-sized firms’ export capacity.”
“In the conduct of monetary policy, foreign exchange rates are not subject to direct control,” a different member pointed out. “The Bank should carefully explain that it needs to continue with monetary easing to achieve the price stability target in a stable manner.”
Some members warned about the negative of the pandemic and the risk of a global recession.
“Depending on its course in Japan, COVID-19 could push down domestic consumption, and its course in China, which has continued to adopt a zero-COVID policy, also could be a factor to push down Japan’s economy through both the channels of external demand and supply-side constraints,” one member said. “Therefore, COVID-19 has remained a significant risk to the economy.”
Another member said, “A virtuous cycle has just started to operate in Japan’s economy. Meanwhile, with major economies — namely, the United States, Europe, and China — seeing slowdowns, there is a certain degree of risk of a global recession and consequent downward pressure on external demand.”
On the inflation outlook, one member said, “The year-on-year rate of change in the consumer price index (CPI, all items less fresh food) has been in the range of 2.5-3.0 percent. It is likely to increase toward the end of this year due to rises in prices of such items as energy, food, and durable goods.”
“Thereafter, the rate of increase is expected to decelerate because the contribution of such price rises to the CPI is likely to wane,” the member said, echoing the board’s latest outlook.
A different member also noted, “The year-on-year rate of change in the CPI is likely to increase in the short run, but sustained wage increases have not been confirmed yet and achieving the price stability target in a stable manner is still faced with challenges.”
Another one cautioned: “Among other risks, that of consumer prices deviating significantly upward from the baseline scenario, including the impact of foreign exchange rates, needs to be examined humbly and without any preconceptions.”
On ways to support firms’ needs, one member said, “While the Special Operations to Facilitate Financing in response to COVID-19, which were introduced as an emergency response, have almost finished their role, COVID-19 is only
halfway to subsiding and it is therefore desirable to phase out the operations.” The same member said, “On the other hand, a surge in raw material prices, for example, has fueled firms’ new demand for funds. It is appropriate to increase the usability of fund-provisioning measures in response to the growing demand for funds.”
At the September meeting, the BOJ board decided to maintain its zero to slightly negative interest rate targets along the yield curve and large asset purchases, as expected, to help the economy recover and anchor inflation around its stable 2% target. The decision on the yield curve control targets was made in an unprecedented unanimous vote versus 8-to-1 votes seen in recent years, as a board member seeking more aggressive easing left the panel in July at the end of his five-year term.
The BOJ also decided to extend its fund provisions to lenders that make loans to smaller firms by another six months and finish the program at the end of March 2023. The program had already been extended by six months until the end of September 2022. During the extended period, the bank will provide three-month funds once a month.
The bank will also extend the period of its funding against loans that financial institutions make on the back of government support to mainly support small businesses by three months and complete it at the end of December 2022. It will provide three-month funds once a month during the extended period.