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--As Fed Looks To Review Policy, Seems Time For BOJ To Follow
By Hiroshi Inoue
TOKYO (MNI) - The Bank of Japan needs to review its conduct of monetary
policy based on traditional economic modelling, as consumer prices still aren't
picking up as much as the output gap and the tight labor market conditions would
suggest, MNI understands.
The BOJ has made achieving its 2% price target the top priority, with the
bank needing to maintain the easy policy for a prolonged period under the
This will increase the accumulated costs that the BOJ must assume and the
risks that market players must face, which in turn will undermine the stability
of the financial system.
The BOJ still thinks Japan's consumer prices will rise and move toward the
2% target, as upward pressure on prices stemming from the positive output gap
will emerge with a time lag and the tight labor market conditions will help push
However, prices and wages haven't risen as the BOJ has forecast, as
structural changes across the economy are impeding higher consumer prices,
indicating a break with previous expectations.
--SLOWING CORE CPI
Japan's nationwide core consumer price index rose 0.9% on year in November,
decelerating from 1.0% in October, leaving BOJ officials cautious over their
inflation outlook. The inflation rate remains stubbornly slow in responding to a
sustainable economic expansion and tight labor market conditions, with firms
still cautious about raising retail prices.
It will take a long time for the inflation rate to hit 2% and the BOJ must
maintain its easy policy as long as it aims at achieving the 2% price target.
But now is a good time for the BOJ to consider whether it is appropriate
base monetary policy aimed on the 2% price target, as economic structures have
The U.S. Federal Reserve has realized that traditional management of
monetary policy isn't consistent with current economic and price conditions and
the Fed ushered in the need of reviewing policymaking process.
In November, the Fed said it plans to invite external stakeholders to
review its policymaking processes next year in a broad outreach effort that
appears similar to what some other central banks do from time to time.
"With labor market conditions close to maximum employment and inflation
near our 2 percent objective, now is a good time to take stock of how we
formulate, conduct, and communicate monetary policy," Fed Chair Jay Powell said
in a press release.
This Week, Olly Rehn, Finland's national bank governor and a member of the
European Central Bank's Governing Council, called on the ECB to undertake a
similar review of its available policy tools.
BOJ economists need to analyse carefully how there appears to be a
breakdown in previous correlations, with inflation seemingly slow to respond to
the improving output gap, or whether a pick-up in inflation will come, just
The BOJ, in a similar way as the Fed is aiming to, needs to increase the
transparency and accountability and build greater public trust in the central
bank regarding the conduct of monetary policy.
--MNI London Bureau; tel: +44 203-586-2225; email: firstname.lastname@example.org