MNI State of Play: BOJ Blames Low CPI on Pessimism,Rigid Labor

By Max Sato

     TOKYO (MNI) - Bank of Japan Governor Haruhiko Kuroda blamed the Japanese

public's stubborn deflationary mindset and the nation's rigid labor market for

the central bank's slow progress toward achieving its 2% inflation goal, denying

that innovation is limiting wage growth.

     At a news conference after the latest BOJ board meeting Tuesday, Kuroda

also sought to justify the massive asset purchases and cash injections into the

banking system that the bank has conducted for over four years, which critics

argue is having increasingly negative side-effects without doing enough to boost

growth and inflation.

     "If companies had firmer growth prospects, they would invest in equipment,

hire people and raise wages, and then raise prices. But they have not reached

that stage yet," Kuroda said.

     "The other thing is that Japan's labor market is divided into regular and

non-regular employment. Tight labor conditions have clearly been reflected in

the non-regular market, where wages have risen 2% to 3%, but the market for

regular workers is a completely different world."

     Wages for regular employees at major firms are set every spring for the

coming fiscal year, a rigid system that does not respond to fluctuations in the

economic and business climate for the rest of the year, he explained.

     The governor didn't go further on this issue, but his comments are tacitly

directed at reform foot-dragging on the part of the government, including not

changing labor law to make it easier to fire workers.  

     Economists have been calling for a more flexible labor market in which

salaries are set according to performance, not seniority, and employees can

switch jobs more easily by offering their transferable skills and experience,

instead of being required to show loyalty to their employer.

     Government regulations on care-giving and daycare businesses are also

keeping the wages for those working in the sector low, aggravating the labor

shortage and worsening working conditions. The lack of those services is

hampering women from joining for returning to the workforce, a factor limiting

the economy's growth potential.

     "Unlike in the U.S. and Europe where innovation and immigration is putting

a lid on wage growth, in Japan, if the deflationary mindset is wiped out and

expectations for economic growth become higher, upward pressure on wages will

rise," Kuroda said. "In addition, if the labor market becomes more homogenized,

wages will become easier to increase."

     "Compared to other counties, Japan is in a unique situation where both wage

hikes and moves to pass higher costs onto prices are lagging behind the

improvement in the real economy," he said.

     During Tuesday's news conference, there was a tense moment when Kuroda was

miffed by a question on how he felt about handing over the reins to a successor

next April after failing to guide zero inflation to 2% while pushing back the

target timeframe six times during his five years in office. 

     "It would be a different story if you think it would have been all right

without monetary easing and letting the economy get worse and prices keep

falling," he said.

     "If not, I'll tell you that we have been conducting the most appropriate

monetary policy, which has helped the economy expand and prices rise gradually.

Our current outlook is that it is highly likely that 2% (inflation) will be

achieved around fiscal 2019."

     Kuroda also replied bluntly, "I'm not sure what risk of prolonged monetary

easing you are talking about. Monetary policy is for price stability and we are

doing the best we can for that."

     In response to other questions, Kuroda said the BOJ board will debate an

exit strategy on ways to reduce massive monetary stimulus only when it can see a

good prospect for achieving the 2% inflation target or the target has been

actually achieved.

     He didn't clearly answer the question as to whether the BOJ may tweak the

current flat bond yield curve or allow interest rates to rise before the 2%

target is achieved.

     "It will be worth considering adjusting the yield curve as prices rise but

it is too early to have a specific debate at this point," he said. "Given

current economic fundamentals, there is no need for interest rates to rise or to

allow higher interest rates now."

     His comments appear to be aimed at keeping market participants from

speculating that the BOJ is preparing for slowing the pace of asset purchases.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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