The Bank of Japan has released its April meeting minutes, with many officials reiterating the central bank’s intentions to continue with its ultra-loose monetary policy. Central bank Governor Kazuo Ueda said on Wednesday that “The Bank of Japan (BoJ) will patiently maintain an easy monetary policy to stably and sustainably achieve the 2% price target accompanied by wage growth.”
USD/JPY strengthened following the dovish comment from the BoJ Governor. The pair is up 0.40% on the day.
Ueda explained that Japan’s economy has recovered moderately and is improving, and the financial system remains stable, with the impact of the US banking system failures to have had little effect on Japan’s economy.
Seji Adachi’s comments on maintaining monetary easing
Similarly, Bank of Japan (BoJ) board member Seji Adachi said on Wednesday, that “it is too early to make changes to easy monetary policy.” With global economic risks, Japan’s economy was also at risk with inflation accelerating faster than expected, growing uncertainty and risks to the price outlook. Seji Adachi explained that the focus will fall on goods prices this summer and if these don’t fall, the central bank may have to revise its scenario that consumer inflation will slow back below 2% around middle of current fiscal year.
Adachi clarified that the BoJ will have to maintain its loose policy, since if there is a global recession, Japan’s prices will come under pressure. If overseas growth recovers and pushes up domestic prices, then they will consider a policy shift. However, as he explained, the bank’s members fear a premature policy shift that would put Japan back to deflation.
Higher inflation
Japan’s core inflation rate reached 3.4% in April and has remained above the central bank’s 2% target for more than a year. The bank expects the pace of growth to decelerate gradually toward the middle of fiscal 2023, with consumer prices to drop slowly after rising due to higher costs and a rise in import prices.
Governor Kazuo Ueda is under pressure with inflation, while wage inflation is also expected to increase after employees received the biggest pay raise in 25 years following March negotiations with top Japanese companies.
A few members of the BoJ have pointed out that commodities and raw materials price increases have continued to be passed on to consumers with a time lag, while another member said that an increasing number of factors led firms to push their selling prices higher.
One member expressed the view that high wage increases could lead to an improvement in consumer sentiment, while another member noted that high wage increases should be expected in 2024.
A few members said that in order to bring inflation around the 2% target, it was necessary to see an improvement in wage developments, in the growth expectations of companies, and inflation expectations.
Some members expressed the view that it was reasonable to maintain the current monetary easing due to the fact that it was difficult to assess inflation expectations and how sustainable future wage hikes will be.
BoJ’s yield curve control (YCC) policy
Adachi explained that it will be problematic to adjust monetary policy based on elevated inflation by merely using data from our July meeting. Instead it will be more appropriate to look at several months’ price data, and how fast prices have moved in order to determine price trends.
He said that monetary policy should not be defined solely on price moves and that they will also look for any distortion in yield curve and bond market functions. He made it clear that the bank will not use monetary policy to manipulate FX rates as that would obstruct progress made in achieving 2% inflation target.
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