In its first meeting, the Bank of Japan’s new policymaking team under Gov. Kazuo Ueda decided on Friday to continue the central bank’s dovish monetary stance but will conduct a comprehensive review of its overall policy going back two decades.
The BOJ said it will spend about 12 to 18 months on an overhaul of its monetary policy — Ueda previously suggested that plan during his inaugural news conference earlier this month.
“Since the late 1990s, when Japan’s economy fell into deflation, achieving price stability has been a challenge for a long period of 25 years,” the central bank said in a statement.
Given that a series of monetary measures implemented during that period have impacted “wide areas of Japan’s economic activity, prices, and financial sector,” the bank will be reviewing its policy.
Asked whether the central bank will not change its monetary policy during the review period, Ueda denied that would be the case.
“We will be implementing necessary measures whenever they are needed,” Ueda said, adding that the overhaul is not intended to affect measures dealing with immediate issues.
While the bank carries out its internal review, it will also ask outside experts to join the effort and collect opinions from various perspectives, Ueda said.
The first policy meeting under Ueda ended without surprises, with the bank staying the course on its aggressive easing. That policy includes its so-called yield curve control: buying unlimited amounts of 10-year Japanese government bonds to keep yields at around 0% while setting the short-term interest rate at minus 0.1%.
Yet the BOJ changed its future guidance on monetary policy by scrapping references to monitoring the impact of the COVID-19 pandemic and its expectation that policy interest rates would stay low. It also added a phrase that the 2% inflation target needs to be “accompanied by wage increases.”
“I think (the future guidance) was carefully crafted” to avoid putting stress on markets, said Toru Suehiro, chief economist at Daiwa Securities.
For instance, eliminating the mention of COVID-19 might lead people to think that the economy is recovering and that the BOJ is getting ready for rate hikes, but clarifying that the inflation goal needs to be backed by wage raises “gives an impression that even though the BOJ is changing the future guidance, it will not be rushing toward tightening,” Suehiro said.
Although speculation had grown that the BOJ would move rather quickly to modify monetary policy after the exit of former Gov. Haruhiko Kuroda, Ueda has been cautious about signaling immediate policy shifts.
Since he was nominated for the BOJ’s top job, Ueda has repeatedly stressed that the current monetary stimulus is appropriate to sustain Japan’s economic recovery. He has also said the target of stable and sustainable 2% inflation remains unchanged as well.
While admitting some side effects of the decadelong ultraloose easing, Ueda has implied that he will not be rushing to deal with them for now.
In its quarterly report released Friday, the BOJ made an upward revision to its inflation outlook. It projects that consumer prices excluding fresh food for the fiscal year through March will be 1.8%, compared with 1.6% in the previous report, while the estimated figure for fiscal 2024 is 2.0%, up from 1.8%. The central bank also revealed its first inflation outlook for fiscal 2025, at 1.6%.
According to government data released Friday, consumer prices excluding fresh food in Tokyo climbed 3.5% in April from a year ago. Inflation seems to have peaked in January at 4.3%, as it slowed down to 3.3% and 3.2% in February and March, respectively, but it has gained speed again.
Meanwhile, the momentum for wage hikes is gaining steam, as higher import costs due to soaring commodity prices and a weak yen have prompted a number of companies to raise prices and pay.
The Japanese Trade Union Confederation, better known as Rengo, said the average pay raise among 3,066 of its affiliated unions as a result of this year’s spring wage negotiations was 3.69%, the highest in about three decades.
With Japan seeing wage hikes pick up and the BOJ raising its inflation outlook to around 2%, it may seem that the country is nearing the bank’s goal. But Ueda warned that there are still uncertainties regarding the fate of inflation and wage growth, so the central bank intends to take more time to assess the situation.
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