Bank of Japan and Inflation: Updated Jan 16, 2024

 

Bank of Japan chief sees increasing chance of achieving 2% inflation goal

Article source: https://mainichi.jp/english/articles/20231106/p2g/00m/0bu/016000c

Article:

TOKYO (Kyodo) -- Bank of Japan Governor Kazuo Ueda said Monday that Japanese companies have become more proactive in setting prices and wages, and the likelihood of attaining the central bank's 2 percent inflation target is "gradually rising."

Ueda made the remarks after the BOJ last week stuck to its ultralow rates but decided to allow long-term government yields to rise above its previously rigid ceiling of 1.0 percent to reduce side effects.

Ideas:

Usually, the Bank of Japan prefers to sound positive as it doesn't want to scare the financial markets, So it always uses language that is somewhat positive.

The use of Japanese companies needs to be understood that the Bank of Japan is mostly talking about large companies as in April of 2023, for the most part, only large companies increased wages to 3.5%.

And again, 70% percent of Japanese wage earners don't work for large companies but small or midsize companies, and many of the small and midsize companies either were unable to increase wages or just didn't want to do it at the times.

The Bank of Japan has been trying to reach the 2% target for many years, and hasn't actually achieved it yet. But it might be coming soon.

Article:

In a speech to business leaders in Aichi Prefecture, central Japan, Ueda acknowledged he could not foresee the stable and sustainable achievement of the inflation target "with sufficient certainty."

"It is necessary to closely examine whether changes in firms' wage- and price-setting behavior will become widespread and the virtuous cycle between wages and prices will intensify," Ueda said.

The BOJ's "basic thinking on the conduct of monetary policy is that it will patiently continue with monetary easing under the framework of yield curve control, aiming to support Japan's economic activity and thereby facilitate a favorable environment for wage increases," he added.

Ideas:

For many years, Japan has been a state of either stagnation and or deflation, which has kept the Japanese economy in a state of limbo and not growing much.

In the present time, as to not rock the boat and or cause harm in the financial markets, the Bank of Japan most likely will stay the course on its current monetary policy.

There might be some significant changes in later spring of 2024, it companies again increase wages to the point that the Bank of Japan is satisfied that it good for the economy.

If wage increases in April of 2024 turn out to be less than positive, then most likely the Bank of Japan will not change it ultralow policy other than as small tweak here or there.

Article:

Under the yield curve control program, short-term interest rates are set at minus 0.1 percent and 10-year yields are guided to around zero percent.

The latest tweak to the program was the strongest signal yet the dovish central bank is also preparing to unwind the massive monetary stimulus that it has pursued over a decade or so when the inflation goal comes into view.

Ideas:

Unwinding the Bank of Japan's ultralow policy is not going to be easy as it could take a long time to unravel the decade long policy, as the Bank of Japan doesn't want to cause any major harm to the Japanese economy and or the financial markets.

As such it might take very small or micro-small step to unravel the policy. And or it will make some changes and then watch and see what happens when it makes the changes.

Short-term interest rates might go from minus 0.1 to maybe plus 0.1 and then the Bank of Japan will watch carefully to see how the Japanese economy reacts and the financial markets react. If the Japanese economy and the financial markets react positively with no major problems, then the BOJ will consider another rage hike to 0.2 percent for example.

Article:

While 10-year yields will be allowed to rise further to reflect economic fundamentals, Ueda reiterated he does not expect them to rise significantly above 1.0 percent.

"The bank will continue with large-scale (bond) purchases and, in a phase of rising interest rates, will keep making nimble responses through market operations depending on factors such as the levels and the pace of change in long-term interest rates," he said.

Ideas:

So it sounds like the Bank of Japan is planning on small changes in the market and then seeing how those changes might affect the economy and the financial markets.

Regarding large-scale bond purchases, the Bank of Japan and the Japanese government already have the large debt to GDP ratio among advanced economies.

But at the same time, most if not all of the debt related to bonds is owned by Japan and it is not external, like the Greece case in 2010.

But again, April 2024, the beginning of the Japanese fiscal year, if companies give larger than expected wage increases, then the Bank of Japan will most likely begin to make some changes its it current policy. If the wage increases are not that significant then the Bank of Japan might not make any changes, or if they do makes changes, they might not be that significant.

Have a nice day and be safe!