Bank of Japan And Inflation: Updated on Oct. 24, 2023.

 Article Source: https://mainichi.jp/english/articles/20230707/p2g/00m/0bu/002000c

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TOKYO (Kyodo) -- The Bank of Japan is far from raising interest rates as tightening monetary policy prematurely will put its goal of attaining 2 percent stable inflation at greater risk, Deputy Governor Shinichi Uchida said.

Uchida pointed to budding signs that Japanese companies are changing their stance on price and wage hikes. But he said in a recent interview with Kyodo News that uncertainty is still high over the inflation outlook as he stressed the need to persist with monetary easing to support the economy.

Ideas:

The Bank of Japan probably knows that the side effects of the increasing the key interest rate is not in the best interest of the Japanese economy.And there is no guarantee that inflation will decrease.

So most likely the Bank of Japan is just letting inflation run its course and hoping that companies will increase wages over the next year, with the idea that its better to just let inflation be and see if it will go down naturally.

Some of the bigger companies have already increased wages but maybe many small and medium sized companies want to do it, but their profit margins just don't allow it at this time.

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 The BOJ has denied market speculation of a policy change when the rise in the country's inflation rate has stayed above 2 percent. The central bank's dovish stance, in contrast with its U.S. and European peers, is behind the yen's recent declines relative to the U.S. dollar and euro.

Uchida said "rapid and one-sided" yen weakening is not desirable and the BOJ will coordinate closely with the government, adding to recent warnings by Japanese authorities about the currency's precipitous moves that have kept the market wary of potential intervention.

Ideas:

The variance between the US dollar and EU euro might be good for Japanese exporters but not so good for importers and the domestic economy. Japanese exporters, with a weak yen, can get more for their products while importer have to pay more for the imports into Japan.

So the weak yen might help the Japanese exporters but hurt the rest of the economy with higher import costs.

What the Bank of Japan and the Japanese government don't need or want is a financial market scare related to any intervention in the market.

So the Bank of Japan will take a stance that doesn't cause any harm in the market.

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"We are far from a situation in which we need to raise interest rates hastily. The risk of tightening monetary policy prematurely and missing the chance to achieve 2 percent inflation is far greater," Uchida said in his first interview with a media organization since he became deputy chief in March.

"Signs are finally emerging that companies are changing their behavior that had been in place since Japan was in deflation. It's important to nurture such buds of change with care," he said.

Ideas:

The Bank of Japan seems to want inflation to increase naturally meaning with increased consumer demand and consumer spending and not inflation related to companies passing-on their costs. If companies increase prices because of increased demand and or increased consumer spending that is better way to solve the inflation challenge.

But Japan has a long way to go to reach that level, as Japan is not a consumer spending economy like the US.

And if the Bank of Japan moves too fast it could cause some serious side-effects related to its strategy of increasing inflation in a natural way.

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He maintained that higher import prices have been driving recent inflation in Japan and such cost-push factors will dissipate in the coming months. Still, rising prices are putting a "burden" on households, and a "balanced" policy approach is needed, the deputy governor said.

The BOJ has stressed the need for robust wage growth to attain stable inflation. After wage negotiations between labor unions and management this year, the country saw its best pay hikes in about three decades, with an average increase of 3.58 percent, a tally released Wednesday by the Japanese Trade Union Confederation known as Rengo showed.

Ideas:

While inflation is a major challenge for Japanese households the Bank of Japan needs to be very careful because any intervention as any kind of intervention could back-fire and make the situation worse.

The US and the Federal Reserve, the US central bank, hasn't exactly solved it inflation challenges by increasing the key rate.

The key is, wage increases but its got to be more than just large companies as the Japanese economy is more that a few large companies. 

What is going to happen is a wage growth inequality situation where large company workers get good wage increase while the rest of the workers in small and medium sized companies get left behind with the Japanese economy not balanced and benefits only a few workers.

An average wage increase of 3.58 percent might sound good but with inflation at 4 percent or higher its still not good enough. And many, again, Japanese workers didn't get any wage increase so far. 

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But the output gap, another key indicator to see the inflation outlook, remained negative in the January-March quarter, according to the BOJ's data. A positive output gap often leads to higher inflation.

"Uncertainty is high over the inflation outlook, including the impact of price-setting behavior and wage hikes by companies. We have not reached a point where we can foresee the 2 percent price stability target can be attained stably and sustainably," Uchida said.

Ideas:

Inflation is both positive and negative. Its positive in that it shows that there might be good consumer spending, consumer demand, and good business investment and spending, At the same time is negative if it gets above 4 percent and or it just the passing-on of company costs without regard to consumer spending or demand.

Most central banks want to keep inflation between 2 and 4 percent as they feel its at a manageable level. Below 2 percent and the economy is moving too slow, and above 4 percent most central banks feel it might be moving too fast.

But the pandemic has changed everything, or a lot in that the inflation now doesn't seem to fit any mold or economic model at this time.

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The BOJ is scheduled to update its economic growth and inflation forecasts in late July when it holds a two-day policy-setting meeting.

The rise in the core consumer price index excluding volatile fresh food items has stayed above 2 percent for more than a year. But the index is currently forecast to rise 1.8 percent in fiscal 2023 from a year earlier, with many analysts expecting an upward revision to the outlook.

Ideas:

The core consumer price index can be very mixed depending on what consumers want or need. Some groups might not notice any real changes in what they buy but lower-income groups might feel significant changes in what they want or need.

Even a 1.8 percent increase in 2023 can have a significant effect on fixed income groups over time.

The key is finding a balance in handling inflation where the approach or strategy helps those who need help but doesn't disrupt the normal functions of a market economy overall.

If too much intervention then an economy becomes unbalanced and central banks now have to introduce some strategies that might have some not so good side-effect to correct the imbalance in the economy.

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"There is no doubt that it (the more than 2 percent rise in the core CPI) has put a burden on households," Uchida said. "Under such circumstances, we believe it is important to support the economy with the current monetary easing so that inflation will be stable at 2 percent, accompanied by wage growth."

Financial markets have speculated that the BOJ will modify or scrap its yield curve control program, under which short-term interest rates are set at minus 0.1 percent while 10-year Japanese government bonds are guided to around zero percent. The central bank raised the 10-year yield cap to 0.5 percent in a surprise move in December to rectify market distortions.

Ideas:

At the present time there is still an imbalance between inflation and wage growth with wage growth around 3.58 percent and inflation hovering around 4 percent overall. 

But the problem not everyone got a 3.58 percent increase in wages as many small and medium sized companies either didn't increase wages that much or not at all so the 4 percent inflation is still there, on many products for Japanese households.

With Japanese government bonds at around zero, most likely Japan is not going to see a lot of international investors interested in the Japanese bond market. But could be a good situation it that too bond buying can drive up the price and inflation in the markets.

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After the previous policy meeting in June, Kazuo Ueda, the BOJ's chief, said it would be inevitable for a change to the yield cap program to come as a surprise. One board member said at that meeting that the central bank should start considering how to "treat" the program at an early stage.

"Enabling financial markets to price in a specific policy change in advance is difficult under the yield curve control. But we have been ensuring financial market stability through controlling interest rates directly," Uchida said.

Ideas:

Financial markets usually don't want surprises and prefer to be told ahead of time of what is going to happen. But in this case the Bank of Japan might be using the best strategy and maybe Japanese markets won't change too much with a sudden change.

The Bank of Japan seems to have done a very good job of ensuring financial stability in that it hasn't done anything, it seems since the pandemic, or before, that has cause ripples in the financial markets. 

So while the Bank of Japan might appear to be slow to solve challenges its most likely done exactly what its supposed to do by not disrupting normal market functions too much.

Again there are those that think the BOJ has not done enough to solve the inflation challenges but at the same time, too much intervention can has some serious side-effect that could be worse that the medicine itself.

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"Considering the characteristics of yield curve control, we will ensure appropriate communication and financial market stability within that framework," he said.

Asked about the yen's weakness, Uchida said the BOJ will closely monitor its impact on the economy and prices. The yen has briefly fell beyond the psychologically important line of 145 to the dollar last week as financial markets expect more rate hikes by the U.S. Federal Reserve and the European Central Bank.

Ideas:

Again, a weak yen is good for Japanese exporters but not so good for Japanese importers and the overall domestic economy.

But even a too low weak yen can have challenges for Japanese exporters and a too weak yen, mean higher export prices and the weak yen might price itself out of the market with competition from South Korea and China and all three countries have similar products in, for example the US market.

More key interest rate hikes, while the standard strategy or approach to inflation just doesn't seem to be working as inflation is still high in the US and the EU.

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"The yen's rapid and one-sided depreciation raises uncertainty over the outlook, which is not desirable. It's important that foreign exchange rates move stably, reflecting economic and financial fundamentals," Uchida said.

"The BOJ will coordinate with the government, and closely monitor developments in the foreign exchange market and their impact on the economy and prices," he added.

Ideas:

Exchange rates are not desirable as companies for example want a stable rate up or down as a way to prepare for changes. 

Importers and exporters, on opposite sides of a coin need stability and not up and down swings in the exchange rate, as they need time to change and prepare for any up or downs in the economy and they exchange rate.

Large companies, for the most part, have the resources to handle fluctuations in the markets, but small and medium sized companies might not have the same resources available to handle the fluctuations in the markets.

 Have a nice day and be safe!