BOJ Policy: Updated Jan. 5

Article Source: https://mainichi.jp/english/articles/20211217/p2g/00m/0bu/059000c

Article:

TOKYO (Kyodo) -- The Bank of Japan is not headed toward policy normalization like the U.S. and European central banks as its 2 percent inflation target is still far off and aggressive monetary easing needs to be maintained, Governor Haruhiko Kuroda said Friday.

Policy decisions by monetary authorities of other countries are based on their own economic conditions and will not immediately impact policies of the Japanese central bank, Kuroda said. Even if their rate hikes lead to a weaker yen, it will likely be "positive" for the Japanese economy under the current circumstances.

Ideas:

The 2 percent inflation target has been out of reach for the BOJ for a very long time. Perhaps its time to, at the present time, to not focus on the 2 percent inflation target but focus more on making sure small and medium sized companies survive the pandemic situation, and then when they pandemic has run its course, then get back to trying to figure out how to reach a 2 percent inflation rate.

As long as the pandemic keeps society and the Japanese economy from not being at its potential, most likely there is not going to be enough consumer demand to reach the 2 percent goal.

Producer inflation might be increasing but that is a different situation from consumer demand and consumer inflation. And as companies are reluctant to pass on their supply cost to those next inline including consumers, there most likely won't be an increase in consumer inflation anytime soon.

The BOJ is correct to not let what is happening in the US and the EU affect what it does related to rate increases or decreases, as the situation in Japan is unique to Japan and different strategies and tools are needed that what is used in other countries.

Article:

"We've seen inflation accelerating to a great extent in the United States and Europe and moves toward policy normalization, while in Japan the rise (in the core consumer price index) is around zero percent...and we are too far from 2 percent," Kuroda told a press conference after a two-day policy meeting.

"It's necessary to keep the current monetary easing steps strenuously," Kuroda said.

The Japanese central bank is closely watching the impact of the Omicron variant of the coronavirus on economic activities and is ready to ease further if needed, Kuroda said.

Ideas:

As reported today, on Jan. 5, there were supposedly 1,000 omicron cases. So it looks like the omicron situation has finally hit and taken affect in Japan.

And now, as usual, the media will be reporting the number of omicron cases in all media outlets.Which means society and consumers will be reading and listening to the news and then, as usual, begin to take extra precuations, which may include not going out as much, not going shopping as much, not going to restaurants as much, and not going to supermarkets as much, meaning of course less consumer spending, meaning less consumer demand, and the 2 percent consumer inflation rate becomes even more unrealistic at this time.

Its interesting the 1,000 cases were reported just as the New Year holiday period was ending, which means of course a lot of people moving around which might have had an affect on the increase in cases.

If this omicron situation in Japan, like the delta situation in July/August gets too much out of control, the BOJ needs to watch carefully what is happening to some small and medium sized businesses, especially those in the service industry.

Article:

The remarks came after the U.S. Federal Reserve signaled three rate hikes in 2022 and decided to end bond-buying faster than previously planned. The Bank of England on Thursday became the first central bank in advanced economies to raise interest rates since the COVID-19 pandemic.

Kuroda said the BOJ is aiming for 2 percent inflation but rising prices should come with wage growth.

Prime Minister Fumio Kishida is calling for wage hikes to achieve his policy of wealth redistribution. The government plans to offer tax breaks to encourage companies to raise wages.

Ideas:

Again, the BOJ of Japan should ignore what is happening globally as Japan has its own unique circumstances and must work to solve them, without trying to match anything that other central banks are doing. 

What works in the EU might not be needed for even appropriate for Japan and the same for what works or is happening in the US might not be relevent to Japan's situation.

Kuroda is right, in theory, that rising prices should come with wage growth. But in reality sometimes society and the economy don't follow economic theory exactly. 

What Kuroda is hoping for is an increase in wages will increase consumer spending, as workers/consumers feel better about their increase in wages and will begin to spend more in the economy, which means consumer demand will begin to increase which means, as companies feel and see more sales and more consumer demand begin to increase prices naturally, which means a beginning of an increase in inflation in Japan.

That would be the natural way for inflation to increase, but the problem is companies have been unwilling to increases wages and salaries, with some suggesting its been 10 years since many companies have increased wages.

The reason of course is they are constrained, or have no room to increase wages as some suggest, while other have suggested it goes all the way back to the 2008 global finacial crisis and at that time many companies globally, and not just in Japan decided wage increases were not what we need to do or want to do.

So now Prime Minister Kishida has decided to entice companies with some new incentives to increase wages with tax incentives or lower taxes for those companies that increase wages to a certain level.

As to how many companies are going to participate in the tax incentive scheme remains unknown at this time as the omicron situation, along with supply line challenges might put a dent or decrease the number of companies willing to increase wages.

Only time will tell as to what will happen in April 2022.

Have a nice day and be safe!