BOJ and Monetary Policy:

 Article Source: https://mainichi.jp/english/articles/20220606/p2g/00m/0bu/024000c

Article:

TOKYO (Kyodo) -- Monetary tightening is not a "suitable" measure at all for the Bank of Japan as the domestic economy is still in the midst of a recovery from the COVID-19 pandemic while higher commodity prices are adding downward pressure, Governor Haruhiko Kuroda said Monday.

Even though core consumer inflation jumped 2.1 percent in April from a year earlier, it does not mean the BOJ's 2 percent inflation target has been achieved, Kuroda said, stressing that the central bank will not waver in its aggressive monetary easing to support the economy and ensure more robust wage growth.

Ideas:

It seems monetary tightening is good for when there is inflation related to an economy is overheating, meaning demand and spending are maybe more than what they should be.

But in the current situation the opposite is happening. Inflation is related to evergy and raw material cost increases and not related to consumer demand or overheated business spending.

So the Bank of Japan might be corrrect in its assessment of how to manage the economy compared to what is happening in the US and Europe.

The Bank of Japan's 2 percent target has not been reached yet. The 2 percent target is related to consumer demand and consumer spending, meaning when consumer demand begins to increase a lot and consumer spending begins to increases businesses will then increase their prices based on consumer demand not based on raw material costs, then the Bank of Japan's target of 2 percent can be acheived.

At this present time the Japanease economy might be to weak to for any signficant increase in consumer spending that would lead to a 2 percent increase in conumer inflation.

Article:

His remarks, made at an event organized by Kyodo News, reinforced the view that the BOJ will remain an outlier among major central banks that are transitioning to tighter monetary policy to rein in soaring inflation.

The yen has been falling as financial markets price in the prospect of such policy divergence, but Kuroda said yen weakness is "positive" as long as it is not rapid. It will also benefit pandemic-hit service providers in regional areas as Japan is set to reopen its doors to foreign tourists from Friday, he added.

Ideas:

The Bank of Japan, based what's happening in the Japanese economy, should remain an outlier and not try to follow what the US or Europe is doing at this time.

A weak yen has always been seen as a positive for the Japanese economy and for its exporters who can get more for the product they sells in overseas markets.

Importers and exporters prefer to see an yen or currency that is somewhat stable and not volatile or one that doesn't change too fast, as it allows them time to prepare and protect themselves from any sudden shifts in the currency rate.

But now the yen might be weakening too fast for some importers to react and or protect themselves and now they have to pay more for what they import into Japan.

Regarding foreign tourists and the weak yen. Yes its definitely going to help those businesses where the international tourists can spend. 

But group tours might be too limited to see any signficant effect on the Japanese economy and there are just not going to be enough of them. 

Even if for example 100,000 tourists arrive in Japan in June that is not even a drop in the bucket of how many came to Japan in 2019. Despite the virus situation its time for Japan to just open everything up for the good of the economy and for the good of those businesses that have been suffering since the government shut down international tourism in Japan.

Article: 

"Unlike other central banks, the bank has not faced the trade-off between economic stability and price stability," Kuroda said in his speech. "For this reason, it is certainly possible for the bank to continue stimulating aggregate demand from the financial side."

Under its yield curve control program, the BOJ sets short-term interest rates at minus 0.1 percent while guiding 10-year Japanese government bond yields to around zero percent.

To defend its cap on the benchmark yield, the central bank announced it would buy unlimited amounts of 10-year government bonds at a fixed rate of 0.25 percent every business day.

Ideas:

Prices might be increasing in Japan but not at the rate that is seen in other countries. But at the same time even small increases in prices for some might be a contraint or a challenge.

Japan is a very stable economy but also an economy that doesn't grow like other economies. Japan sometimes is lucky to get even 1 percent in GDP growth while other advanced economies might get 2 or 3 percent growth at the same time.

The short-terrm rate at minus 0.1 and the bond rate at zero percent doesn't really encourage investments or bond buying but it might be an incentive to businesses to borrow and use it in the economy and a way to increases the flow of of the yen in the economy.

Other articles haved suggested that the Bank of Japan is a branch of the Japanese government and just buys bonds as needed whenever the government asks them to do so.

But Kuroda came out very quickly and said they are an indepdent agency and not subject to government pressure or suggestions.

Article:

"Japan's economy is still on its way to recovery from the pandemic and has been under downward pressure from the income side due to rising commodity prices. In this situation, monetary tightening is not at all a suitable measure," the BOJ chief added.

The recent bout of inflation is a mixed result for the BOJ because most of it can be attributed to surging energy and raw material prices due to Russia's war in Ukraine, not strong domestic demand.

Kuroda said a growing number of Japanese households have begun to feel price rises, as fuel costs and goods they frequently buy, such as food, are becoming more expensive.

Ideas:

If the Japanese economy is still on the way to recovery, just when is the Japanease economy going to finally recover from the pandemic situation. 

To be fair and honest, it seems, like some economies, that the Japanese economy is always in a recovery mode or a not quite there mode in terms of full economic growth.

That might be related to low consumer demand, low business investment, a lack of wage increases and so on before all of the pandemic situations came into existence.

Yes, maybe not all families or households are feeling an increase in prices, whether supermarket prices, gas prices, home energy prices and so on. But most likely the lower income groups are feeling th effects of increasing prices.

And then of cousre income and price elasicity might be a factor for some. For example, maybe the increase in prices might not be a factor or that big a deal for some and they don't even notice, but for some, on whatever is important to them, they see an increase in prices and feel the effects and begin to look for subsitutes as needed, if they can.

Article:

The BOJ projects that the rise in the core consumer price index, excluding volatile fresh food items, will only be temporary because commodity inflation will not last and the index is expected to slow to 1.1 percent in the year from next April.

In his speech, Kuroda said the BOJ's failure to attain its 2 percent inflation target after over nine years of monetary easing can be traced to the "zero inflation norm," in which everyone acts in concert to keep prices unchanged.

As inflation expectations have been rising recently and consumers have become more tolerant of price hikes, the BOJ will use its monetary easing to achieve "sustained" inflation, or an inflation rate of 2 percent on average, Kuroda said.

Ideas:

Its hard to say just how long prices will continue increase and or how long they will remain high, as is seems the markets are somewhat unpredictable or unstable at the present time.

There is something to be said about the "zero inflation norm" that might be unique to the Japanese economy that is keeping inflation much lower in Japan compared to the US, South Korea, and Europe.

If the idea that everyone works in concert to keep prices unchanged, that might be a strong point for the Japanese economy.

But it can also be a weakness in that companies continue to absorb increased costs which might limit them from increasing investments and or increase wages for the good of the eocnomy.

Have consumer really become tolerant of price increaes or it is just what the BOJ wants to think. Yes, maybe Japanese consumer recognize that prices are increasing and maybe they have no choice bu accept it or get used to it like in 2014 and the sales tax increase from 5 to 8 percent and in 2019 from 8 to 10 percent.

But lets be clear the 2 percent inflation rate on average is not what the BOJ really wants. It doesn't want supplier increased inflation but wants consumer demand inflation which at the present time is not happening.

Article:

For resource-poor Japan, the recent sharp depreciation of the yen has become a headache because it inflates import costs.

Kuroda reiterated currency moves should be stable, reflecting economic and financial fundamentals.

The recent depreciation of the yen is partly because of the BOJ's dovish stance, which stands in contrast to the United States, where the Federal Reserve has begun raising interest rates. The European Central Bank is also expected to go ahead with a rate hike as early as July.

Ideas:

A weak currency has always been a positive for the Japanease economy with it emphasis on exports. 

But maybe the current weak currency situation has become too much for importers while before maybe they were able to manage a weak currency. Maybe now the weak currency is too weak and they are having to pay more and more and they just can't adjust fast enough to the changing weak currency situation.

It looks like when interest rates in different countries become too far out of line with each other it can trigger and change in the currency situation. As the US and Europe continue increase their rates it triggers the Japanese yen to weaken too much for the good of Japanease importers. 

But the problem, as Kuroda keeps saying, the Japanese economy might be too fragile for a rate increase as businesses and households either have gotten to used to the zero interest rate policy and or there are many households and businesses who need loans to survive and a rate increase for them would not be too good.

Article:

"It is highly likely that stable moves toward yen weakness, not rapid moves, are positive for the Japanese economy as a whole," Kuroda said in a question and answer session, noting that the currency's decline brings varying impacts across sectors and companies.

"What is important for the economy is that companies that have reaped the benefits of yen weakness and seen their profits recover will increase capital spending and raise wages, and there will be a stronger cycle in the economy for more income and spending," he added.

Ideas:

Importers and exporters, and most companies are looking for stability in the currency market which they can prepare for. When the currency moves too fast up or down companiesa are unable to prepare, and they can lose trillion of yen in a day or weak because of the currency changing too fast.

So the BOJ is trying to spin the idea that a weak yen is good for the Japanese economy, which it is for some but of course not for all.

But to be fair he does say the currency's decline brings varying aspects meaning its both a positive for some and a negative for some.

So again he is saying a weak yen will bring about increaesd profits, increased capital spending and an increase in wages. 

Yes, that is true for many companies but not for importers as they continue to see their profit margins continue increase over time.

And an increase in wages just has happened and might not happen as many companies continue to horde the cash they have as they have done for many years and have not given their empoylees wage increases, which means conconsumers/employees have to endure the increase in supermarket prices, home energy prices, gas prices and so on and their disposable income continue to get less and less.

Have a nice day and be safe!