MNI INTERVIEW2: BOJ To Close In On 2% Target In FY25 - Kameda

The Bank of Japan’s first forecast for inflation in fiscal 2025 may be close to its 2% target as policymakers judge the long-hoped-for virtuous cycle of higher prices and wage rises may be gathering traction, a former BOJ chief economist told MNI.

“I expect cost-push inflation to last for the first half of next fiscal year (starting April) and cost-push inflation may be stronger than the BOJ expected,” Seisaku Kameda, now executive economist at Sompo Institute Plus, said in an interview.

He said the BOJ’s base scenario was that cost-push inflation of goods would weaken but services inflation would strengthen together with wage hikes, and prices will rise after two years. “It is uncertain that cost-push inflation of goods will wane," Kameda said.

The BOJ will update its medium-term growth and inflation forecasts in the Outlook Report that will accompany the April 27-28 meeting. The BOJ forecast core inflation of 1.8% for fiscal 2024 in the January Outlook Report. (See MNI BOJ WATCH: Kuroda Entrusts Ueda With Achieving 2% Target)

WAGES IN FOCUS

Kameda expected strong wage hikes this year but wanted clarity on whether it would be a one-time increase or whether increases would be more sustainable over coming years. (See MNI POLICY: BOJ Wary Rising Staff Costs May Crimp Wage Growth)

While the data that the BOJ relies on to assess wage hikes, especially at smaller firms, lags real wage payments, the former chief economist said officials would be aware of positive momentum in wages

"Even before the release of government wage data, (the BOJ) can judge that wage hikes this year will be considerably strong. It is uncertain whether wage hikes continue next year, but the BOJ will likely judge that a positive change has started judging from solid wage momentum,” Kameda said.

He said wages will likely rise considerably this year as many businesses are positively considering raising wages given high prices and continued labor shortages. However, he cautioned that wage increases excluding regular pay rises are the most important data, and they will not be beyond the rate of inflation.

“It is questionable that the government and the BOJ highlight high wage increases including regular pay raises, and I am personally focused on how the government and the BOJ refer to wage hikes,” Kameda said.

If considerable wage hikes through spring wage negotiation and various surveys are confirmed, the BOJ will increase its confidence in price and wage rises. But increasing uncertainties about global growth and the pace of the Federal Reserve’s rate hikes due to the collapse of SVB will make it difficult for the BOJ to judge policy decisions immediately, Kameda said.

SVB FALLOUT

Kameda commended U.S. policymakers on the speed with which they acted to manage the fallout from the collapse of SVB.

“The U.S. authorities took quick and bold measures to avoid systemic risk but the quick action reflected that they were really worried about the impact of the SVB fallout and they took it seriously,” he said.

Kameda, who was in charge of the BOJ’s Financial System Report, said Japanese banks would not face similar problems as SVB as their fund raising didn’t rely on large deposits from specific industries. However, he warned some Japanese banks have unrealised losses on securities due to the Fed’s rate hikes.

“If those banks continue to hold those securities until redemption, the unrealised losses of securities will wane. But the worst is that they face a liquidity shortage and they face the necessity of selling those securities to ensure liquidity,” Kameda said.