MAEBASHI, GUNMA PREF. – Bank of Japan Policy Board member Takehiro Sato said Wednesday that achieving the 2 percent inflation target agreed to by the BOJ will be a tall order and called on the government to enhance its growth strategy to ensure wage hikes.
“At a time when Japan faces rising headwinds, such as an aging population and population decline, setting the price stability target at 2 percent is rather challenging,” Sato said in a speech in Maebashi, Gunma Prefecture.
Sato is one of the two BOJ Policy Board members who voted against setting the inflation target at the BOJ’s policy meeting last month, arguing that the credibility of monetary policy would be impaired if a price target is set before progress is made in implementing the government’s economic growth strategy.
Although he opposed the decision, Sato said in his speech that he is in a position to execute the BOJ’s policy decisions and responsible for their implementation, thus Policy Board members, including him, are “facing the challenge” of achieving the target and raising the credibility of the goal.
To achieve the target, Sato stressed that a recovery in wages is essential, saying “greater fundamental strength of the economy is needed to generate a wage increase of approximately 4 percent” to aim for a 2 percent inflation target.
Sato expressed the view that the target is unlikely to be attained “merely by enhancing ongoing policy initiatives,” and added that both the government and the BOJ “must tackle this issue with much greater vigor.”
He also said monetary policy’s indirect influence on foreign exchange rates is important, citing the stimulus effects of the recent depreciation of the yen on financial markets, including stocks.
“The recovery in asset prices could lead to an improvement in the output gap and in turn a rise in prices, by strengthening the risk tolerance of firms and households and then raising the level of total economic activity,” Sato said.
Regarding the option for the BOJ to increase its purchase of risky assets such as corporate bonds and exchange-traded funds, Sato voiced a cautious view, saying that poses the risk of eroding the bank’s capital base.
“Whether the bank should substantially increase risky asset purchase from the current limit is a matter that involves not only the bank but also the government,” he said.
IMF seeks inflation route
The next governor of the Bank of Japan should announce a path toward achieving its 2 percent inflation target, David Lipton, first deputy managing director of the International Monetary Fund, said Wednesday.
The BOJ’s commitment to the inflation target is a good move, Lipton said during talks in Tokyo with economic and fiscal policy minister Akira Amari.
Amari promised Lipton that the Abe government will try to stimulate the economy in the short term while making efforts to put the country’s fiscal house in order in the longer term.