MNI BOJ WATCH: Closer To 2% Target, But Easy Policy Remains

The Bank of Japan is edging closer to its 2% inflation target but Governor Haruhiko Kuroda dismissed the prospect of any near-term exit from easy monetary policy, arguing current policy settings were needed to deliver inflation coupled with wage hikes.

Kuroda said board members would discuss an exit of easy policy if the 2% price target comes into sight, but officials were still far off from considering an exit as median inflation forecasts for the 2023 and 2024 fiscal years were around the mid-1% range.

“(I don’t think the BOJ) will raise interest rates and an exit (of easy policy) comes soon,” Kuroda said after policy settings were left unchanged as the economy was judged to be moving in line with its baseline scenario despite lingering uncertainties and downside risks. Short term interest rates were kept at -0.1% and the 10-year yield target of zero percent was maintained. (See MNI BOJ WATCH: BOJ TO Maintain Easy Policy, Forward Guidance)

The near term risks to Japan's growth from a more gloomy external environment were reflected by the BOJ maintaining its forward guidance with an easing bias. “With regard to the risk balance, risks to economic activity are skewed to the downside. Risks to prices are skewed to the upside,” the BOJ said. The Economic Outlook released on Friday downgraded the fiscal 2022 GDP forecast to 2% from 2.4% in July's assessment.

KURODA UNCONVINCED

Inflation has finally started to gather pace in Japan and that was reflected in revisions to the Bank's inflation forecasts contained in Friday's Economic Outlook.

The board’s median forecasts for the key inflation rate in fiscal 2023 and in 2024 were both revised up to a rise of 1.6%, up from 1.4% and 1.3%, respectively, in July's outlook report. The BOJ board upgraded its core CPI forecast for this fiscal year to rise of 2.9% from its 2.3% estimate made in July. The pick-up in inflation has been driven by higher commodity prices caused by the weak yen and the pass-through of costs.

Kuroda is yet to be convinced that resurgent inflation pressures can be maintained over coming years. He said that the year-on-year rise in core CPI will slow to below 2%, so it was appropriate to continue with easy policy to support the economy.

“The median forecasts for the core consumer price index in fiscal 2023 and 2024 were revised up but the impact of high import prices will wane, so it is still far from the achievement of the 2% price target in a stable and sustainable manner,” he said.

The governor once again underscored the BOJ's aim to achieve a virtuous cycle of rising incomes and prices. “The 2% price target should be achieved along with wage hikes.”

YEN MOVES UNDESIRABLE

The sharp decline in the yen to a recent fresh 32-year low of JPY152 earlier this month has complicated the BOJ's policy considerations by stoking inflation through higher import prices and by creating uncertainty for businesses. Kuroda said the recent rapid and one-sided moves in the yen had a negative impact on Japan’s economy and were "undesirable."

“It is extremely important for foreign exchange rates to move stably, reflecting economic and financial fundamentals,” Kuroda said.

The Japanese government was believed to have intervened to support the yen on Oct 21 after it traded near JPY152, though this has not been officially confirmed.

Despite recent interventions, the BOJ knows the yen's direction is hostage to the outlook for U.S. monetary policy given the yen has been sold on the widening yield differential between the two economies. (See MNI POLICY: BOJ Sees Yen's Direction Steered By Fed Outlook)