EDITORIAL: BOJ must ensure price stability after change in monetary policy

Release time：2024-05-21 16:54:32 Source：International Insights news portal

The Bank of Japan announced on March 19 it will end its 11-year-old monetary easing policies that were described as “extreme” and belonging “on a different dimension.”

In explaining its decision, the central bank pointed out that this year’s “shunto” spring labor offensive has successfully secured substantial wage hikes, and that it has become feasible to achieve and sustain a price stability target of 2 percent per annum.

The BOJ said it will maintain a relatively loose monetary environment. But attaining its target will entail all sorts of risks.

The bank needs to aim for flexible and careful policy management while thoroughly explaining the nation’s economic and financial policy vision to the public.

LINGERING UNCERTAINTY

By discontinuing its negative interest rates and various measures that kept long-term interest rates low and supported the extreme monetary easing policies, the BOJ will revert to adjusting short-term interest rates up and down as the main pillar of policymaking.

But the rate hike range this time is only 0.1 percent, and the scale of the BOJ’s new government bond purchases will remain virtually unchanged.

BOJ Governor Kazuo Ueda told a news conference on March 19 that the current policies have “become redundant,” having already “fulfilled their role.”

The central bank projects consumer prices to rise by between 2 percent and 2.5 percent in fiscal 2024, and then by nearly 2 percent in fiscal 2025.

The reason is that while the soaring prices of resources overseas have been brought under control, service costs that reflect labor expenses have grown moderately, strongly suggesting the arrival of a “virtuous wage-price cycle.”

It certainly appears that corporations and individuals have snapped out of their mindset of assuming that wages and prices just do not go up.

The economy has been recovering moderately, and corporate earnings and stock prices have remained strong.

We can appreciate the BOJ’s decision that the price stability target should be achievable without relying on stimulus measures, such as negative interest rates.

However, the future is quite uncertain. The BOJ expects the upcoming wage hikes to boost personal consumption, which is still soft due to high prices. But will that really happen?

Overseas economic trends and developments in Ukraine and the Middle East are causes for concern. And regarding prices, the idea that they will rise “2 percent every year” has yet to fully catch on.

Economic and price trends need close monitoring in the days ahead so that immediate action can be taken when necessary.

FRANK ASSESSMENT OF MERITS, DEMERITS

The ultra-loose monetary policies were adopted in 2013 by Ueda’s predecessor, Haruhiko Kuroda.

Since then, adjustments have been made to correct the yen’s excessive strength, stock prices have risen, corporate revenues have remained solid, and deflation was declared over in view of the state of consumer prices.

In the sense that these developments led to extensive discussions on wage hikes that had been overlooked for many years, Kuroda’s policies did achieve something.

Still, that only came after 11 years of trying out unconventional measures. Explaining the reasons, the BOJ points out that people in general simply did not expect prices to fluctuate. In addition, wages did not rise because labor shortages were mitigated by women and senior citizens working part time to pick up the slack.

Put differently, this invalidated the BOJ’s initial argument, which was that the ultra-loose monetary policies will change people’s outlook of the future, making the attainment of the price stability target possible.

The public’s latest change in price awareness was also triggered by an “external factor,” namely, inflation that started overseas.

The spate of unconventional monetary easing policies may well have represented the BOJ’s attempt to overcome deflation by trial and error.

However, the bank also revealed its lack of flexibility by acting as if all its past decisions were infallible. For example, the bank obstinately stuck to its monetary easing policies at the time of the yen’s drastic devaluation in autumn 2022.

Assuming the price target will be attained, the BOJ should still candidly admit that its policies caused prices to rise before wages, hurting people’s household budgets as a result.

The balance of government bonds purchased by the BOJ during that interval exceeds 5.7 trillion yen ($37.621 billion), which the bank will have to keep dealing with.

Unless the BOJ proves its readiness to squarely face its past mistakes as well as achievements, it will not win the trust of the people.

SIGNIFICANCE OF ‘2 PERCENT’ NEEDS CLARIFICATION

Upon the attainment of the “2-percent target” in the period toward fiscal 2025, how will the Japanese economy change, and what benefits will that bring to our lives?

As reasons for setting the target at 2 percent, former Governor Kuroda said it will secure leeway for interest rate reductions. He also pointed out that central banks around the world regard 2 percent as the benchmark.

Ueda, too, has given basically the same explanation.

While we can see the need for “elbowroom” for adjusting interest rates in preparation for an economic downturn, its importance is not readily felt by the public at large.

Moreover, if the BOJ is to maintain its loose monetary policies for the time being, the elbowroom itself will be of a limited scale.

If Japan alone aims for low inflation in disregard of international standards, the yen’s value may well surge, but that is not a major concern at the moment because of the yen’s continued low value.

In the meantime, Ueda said in a lecture given last December that under moderate inflation, it is “easier to set flexible wage and price structures and merchandise strategies.”

He also noted, “As the trend grows stronger for businesses to proactively ‘move,’ the benefits will expand to the entire economy.”

And Deputy Governor Shinichi Uchida pointed out last month: Inflation makes wage adjustments easier; when labor is short, fewer people lose their jobs; and corporate reforms and restructuring proceed faster at individual companies.

We welcome their effort to explain economic transitions, but how factually accurate and reliable are their pronouncements?

They need to provide further analyses to help the public process the situation better.

Unless the significance of the target is understood, there can be no hope even of setting the inflation projection at 2 percent.

The BOJ must recognize anew its heavy responsibility of ensuring that its monetary policies will win the trust of not only experts and markets but also a broad segment of the population.

--The Asahi Shimbun, March 20

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