Bank of Japan Must Carefully Monitor Price Trends

Editorial

12:29 JST, April 29, 2023

The Bank of Japan has held its first Monetary Policy Meeting under its new governor, Kazuo Ueda. The BOJ decided to continue its large-scale monetary easing for now, but it is widely expected that the central bank will revise its policy.

The BOJ must strive to manage its policy flexibly toward stable economic growth, while keeping a close eye on trends in higher prices.

At the meeting, the BOJ maintained its policy of guiding the short-term interest rate to minus 0.1% and the long-term interest rate to around 0%.

The Japanese economy is still recovering from the COVID-19 pandemic and has yet to make a strong recovery. Some medium-sized banks collapsed in the United States in March, and financial concerns are smoldering there and in Europe.

It is understandable that the central bank will persistently continue monetary easing.

However, it has been pointed out that the current monetary easing has had many side effects due to its extended duration.

The BOJ’s massive purchases of Japanese government bonds have created strains in the JGB market. The interest rate differential between Japan and the United States has widened, and the yen has weakened.

In addition to eroding banks’ profits, some analysts believe that low interest rates have led to the survival of poorly performing companies, thus depriving the economy of vitality.

At a press conference, Ueda said, “We have to admit that there are some observable side effects.” The new BOJ management team must deepen debate and consider modifying its policies to mitigate the side effects.

The BOJ also released its Outlook for Economic Activity and Prices. The outlook for the rate of inflation for fiscal 2023 was raised to 1.8% from the 1.6% forecast made in January, and to 2.0% for fiscal 2024 from the 1.8% of the January forecast. The central bank projects fiscal 2025 price increases at 1.6%.

In fiscal 2022, the consumer price index, excluding fresh food, rose 3.0% from the previous fiscal year, the highest increase in 41 years. This is above the BOJ’s monetary policy target of a 2% increase.

The BOJ has continued its monetary easing policy, believing that the rise in prices is mainly due to higher import prices, such as surging energy prices, as opposed to price increases that are accompanied by wage hikes.

Meanwhile, in the latest spring labor-management wage negotiations, many major companies have fully accepted labor unions’ demands for wage increases. The Japanese Trade Union Confederation (Rengo) sought wage increases of 5%, but many companies offered wage increases of more than 5%, and improvements in the treatment of non-regular employees were also notable.

In continuing monetary easing from now on, it will be important to closely examine how wage increases will affect prices.

The BOJ also decided at the policy meeting to review the monetary easing measures it has taken since the late 1990s from various perspectives, which is said to be expected to take from one to 1½ years. It is necessary to analyze the effects and side effects of past policies and apply the findings to policy management under the new team.

(From The Yomiuri Shimbun, April 29, 2023)