The Bank of Japan (BOJ) revised its inflation forecasts upward on Tuesday and flagged the heightening changes that the recent commodity-driven price hikes will broaden, while maintaining its ultra-loose monetary policy in a nod to lingering pandemic uncertainty.
As prices rise swiftly in other economies, Japan’s inflation remains relatively feeble and still far below the long-held 2% target seen as necessary to turbo-charge the world’s third-largest economy.
The BOJ also revised next fiscal year’s growth forecast and offered a more upbeat view on the economy than three months ago, taking in stride the recent spike in omicron coronavirus variant cases at least for the time being.
But with inflation set to remain below its 2% target in the coming years, the BOJ stressed its resolve to maintain its ultra-loose monetary policy even as its global counterparts move toward exiting from crisis-mode policies.
“Consumer inflation is likely to stay around 1% through the end of the BOJ’s projection period. As such, there is no need to modify the BOJ’s monetary easing,” BOJ Governor Haruhiko Kuroda was cited by Reuters as telling the post-meeting news conference.
Japan has recently seen inflationary pressure heighten, Kuroda noted. “This is driven partly by an improving output gap, reflecting a pickup in Japan’s economy. When you look at Japan’s past experience, such as in 2008, price gains driven by rising commodity costs had been temporary.”
“For inflation to become sustainable, we need to see an increase in medium- to long-term inflation expectations.”
As widely expected, the BOJ left unchanged a -0.1% target for short-term interest rates and a pledge to guide long-term rates around 0% at a two-day meeting that ended on Tuesday.
In a quarterly outlook report, the BOJ revised up its inflation forecast for the year beginning in April to 1.1% from the previous estimate of 0.9%.
It also slightly raised its inflation forecast for fiscal 2023 to 1.1% from 1.0%.
“We are not debating an interest rate hike,” said Kuroda. “As shown in the report, we’re not yet in a situation where inflation is steadily accelerating toward the BOJ’s goal. The median forecast of board members is for inflation around 1%. Under such conditions, we are absolutely not thinking about raising rates or modifying our easy monetary policy.”
“The BOJ is likely to stand pat on policy for the foreseeable future, unless the government piles pressure on it to ease the pain of commodity-driven inflation exacerbated by a weak yen. That may prompt the BOJ to fine-tune its policy,” said Izuru Kato, chief economist at Totan Research.
“A weak yen works to boost economic growth and inflation, so there’s no change in the BOJ’s view it is positive for Japan’s economy,” said Kuroda.
“So I don’t think there’s such a thing as a weak yen. But the impact of a weak yen is uneven for each sector.”
Risks to prices are generally balanced, the BOJ said in the report. That compared with its assessment in October, which said risks were skewed to the downside.
As wage increases give households more purchasing power, a broader range of firms will raise prices. That, in turn, will push up inflation and heighten public perceptions that prices will rise further, the BOJ said.
“Inflation expectations are heightening moderately,” the BOJ said, warning of the risk that price hikes could come faster than expected if global commodity costs remain high.
Kuroda’s term as BOJ governor ends in April 2023. But he said he has “no plans to tie debate on policy normalization to my remaining term.”
“We’re not in a condition to debate an exit or policy normalization with inflation still remaining around 1%.”
As corporate profits increase, the labor market could tighten and lead to a moderate rise in wages, the governor noted.
“The government is also using tax reforms to encourage wage hikes. There’s also hope for savings to spur consumption. These are positive factors that could prod households to become more accommodative to price hikes,” he noted.
“We will maintain powerful monetary easing until we see wage and price growth rise sustainably, and lead to a positive economic cycle.”
Even with the latest upward revision in prices, “a change in (the BOJ’s) policy stance is hard to imagine” as the inflation target “is still far away,” said economist Masamichi Adachi of UBS in a note ahead of the Tuesday decision.
“With no Board member expecting inflation to come close to the 2% target for the foreseeable future, talk of policy tightening is premature,” added Marcel Thieliant, senior Japan economist at Capital Economics.
“We are even more pessimistic than the Bank about the medium-term outlook for inflation,” he said in a note.
“We’re sticking to our view that the Bank will keep interest rates low for the foreseeable future.”
Japan’s inflation will be pushed higher mostly by the fading effect of last year’s cellphone fee cuts and the impact of raw material costs in fiscal 2022, said Kuroda.
In fiscal 2023, however, he suggested that inflation will be driven more by an expected improvement in the output gap and heightening inflation expectations – factors that he said would be more sustainable.
“Looking ahead, we can see inflation gradually accelerate toward 2%,” the governor noted.
On Japan’s economy, the BOJ said its “recovery was becoming clearer” as the damage from the COVID-19 pandemic eased, a sign it was taking the recent spike in omicron new coronavirus cases in stride. That was a more upbeat assessment than in October, when it said the economy was “picking up as a trend.”
The BOJ cut its economic growth forecast for the year ending in March as curbs on activity to combat the pandemic dampened consumption and affected supply chains, hitting output.
But it revised up next fiscal year’s growth projection to a 3.8% expansion from 2.9% forecast in October, taking into account the boost from the government’s stimulus package.
A spike in wholesale inflation and rising import costs from a weak yen have led to price hikes for a broad range of goods, hitting households at a time wage growth remains slow.
“We will scrutinize the impact of the COVID-19 crisis and if necessary, ramp up monetary stimulus,” Kuroda said.
“We also expect to keep interest rates at current or lower levels for the time being. We will keep doing so until 2% inflation is stably achieved.”
