/

Kuroda confident that rising labor costs will lift inflation toward BOJ’s 2% target

Kyodo

Bank of Japan Gov. Haruhiko Kuroda said on Monday that inflation will pick up in line with the central bank’s projections, a show of confidence coming days after the BOJ decided to continue using unprecedented monetary easing measures to shore up the economy.

Price gains will gradually gain momentum and rise toward the 2 percent target as it begin to reflect rising labor costs, the BOJ chief said.

“Many Japanese firms have raised wages for their employees but kept the prices of products and services unchanged,” Kuroda said in a speech to business leaders in Osaka.

Businesses may be reluctant to raise prices because of concern that they will lose out to competitors who keep prices low, he said. Going forward, however, firms will find it increasingly difficult to absorb rising labor costs and “attempts to raise sales prices will likely gradually become more widespread across a broad range of industries,” he said.

“Furthermore, as this process lifts actual prices, firms’ and households’ medium — to long-term inflation expectations, or people’s perception of future inflation, will increase,” giving inflation momentum toward the BOJ’s 2 percent target, he added.

At a policy meeting last week, the BOJ’s decision-making board voted to maintain its negative interest rate on excess reserves that financial institutions keep at the central bank, as well as the large-scale purchases of government bonds aimed at keeping long-term rates near zero.

Japan’s economy is on a moderate recovery track, with real gross domestic product officially growing for six consecutive quarters — the longest stretch of expansion in more than a decade. Job availability is at its highest in more than 40 years and unemployment is low at around 3 percent.

But the BOJ’s main yardstick of inflation — a consumer price index that excludes fresh food but not energy — rose a tepid 0.5 percent in July. After more than four years of aggressive monetary stimulus and numerous changes in the target date, the central bank now expects to reach its inflation goal around fiscal 2019, though most economists doubt this scenario will come to pass.

Kuroda also defended the 2 percent target itself, which some economists see as unrealistic and criticize as risking higher living costs if unaccompanied by wage gains.

After years of quantitative easing in response to the 2008 financial crisis, the U.S. Federal Reserve and the European Central Bank now both have significant leads in moving toward normalizing policy. By comparison, the BOJ’s efforts to shield Japan’s economy have been hampered by lower inflation, Kuroda said.

With higher inflation and therefore higher nominal interest rates, “Japan’s economy will have more policy room to mitigate the impact of future economic downturns, or will be equipped with a sort of insurance for sustained economic growth.”