MNI STATE OF PLAY: BOJ's Easy Views Intact Despite Higher CPI

Bank of Japan Governor Haruhiko Kuroda on Thursday said there is no reason to pull back from easy policy, although the board’s median forecast for inflation rates this fiscal year was revised up above the target of 2%.

But the board assess the higher inflation target was not sustainable as wages lag and growth was at the same time tipped down slightly , showing that price levels will not be achieved in the projection period in a decision widely expected, (See: MNI STATE OF PLAY:BOJ To Stand Pat On Policy, Forward Guidance).

“The impact of the positive contribution from energy items on consumer prices will likely wane and corporate cost pass-through will likely peak out,” meaning the rise of CPI will weaken in fiscal 2023, (See: MNI BRIEF: BOJ Ups FY22 CPI View To +2.3%, Cuts GDP To +2.4%).

Kuroda has repeatedly cited stagnant paychecks as a missing element in changing forward guidance with much of corporate Japan following an annual review period in April of every year on pay gains. “Wages are rising gradually but there is no favorable mechanism that wages rise beyond price rises. Wage hikes didn’t catch up with a rise in consumer prices,” Kuroda said.

NO CHANGE TO 10-YEAR BAND

To that end, Kuroda said that he has no plans to change a 10-year JGB interest rate band from a range of -0.25% to +0.25% or interest rates in the face of a weaker yen, which nearly touched JPY140.00 to the USD in July.

“Even if the BOJ raises interest rates a little to curb a yen’s fall, it will not be effective in curbing a yen’s fall. If the BOJ wants to curb a yen’s fall, the bank will have to implement large rate hike. But such a rate hike will worsen economy,” Kuroda said, (See: MNI BRIEF: BOJ's Kuroda Says Recent Rapid Weak Yen Undesirable).

“For the time being, the BOJ will closely monitor the impact of Covid-19 and will not hesitate take additional easing measures if necessary, and also it expects short- and long-term interest rates to remain at their present or lower levels.," the BOJ said in its statement.

SPECIAL PROGRAMME, LANGUAGE CHANGE

A surge in pandemic cases in Japan has brought even more caution to policy and likely prevented the BOJ from deciding on whether to end or extend a special programme to facilitate financing for smaller firms, which is set to expire on Sept. 30.

Policymakers will decide on the matter at the September 21-22 meeting after carefully monitoring how Covid-19 cases evolve and how they affect smaller firms, and whether the government extend its own measures to support smaller firms’ financing, which is also set to end on Sept. 30.

But the BOJ slightly upgraded its assessment on current economic situation, by removing “as a trend” in the wake of a rise in private consumption, and simply said “Japan’s economy has picked up.”