ADVERTISEMENT

BOJ Must Keep ‘Aggressive’ Easing Even as Yen Drops, Kuroda Says

BOJ Must Keep ‘Aggressive’ Easing Even as Yen Drops, Kuroda Says

Governor Haruhiko Kuroda said the Bank of Japan must keep applying monetary stimulus given the more subdued inflation dynamics in the country compared with the U.S., in remarks Friday that omitted any reference to the yen’s depreciation.

“The Bank of Japan should persistently continue with the current aggressive money easing toward achieving the price-stability target of 2% in a stable manner,” Kuroda said in a speech at Columbia University in New York on Friday. “There is still a long way to go to achieve the 2% target in a stable manner.”

While the U.S. has experienced “demand-pull inflation,” in Japan, it’s the run-up in global commodity prices that has had the biggest impact, Kuroda said. 

“It is unlikely that the current rise in commodity prices due to supply factors will immediately lead to a sustained rise in wages and prices,” Kuroda said. “This is because Japan imports most of its resources and demand-pull inflationary pressure in the economy is weak.”

Kuroda’s remarks have come under close scrutiny following the yen’s rapid fall to a 20-year low and the BOJ’s unprecedented defense of its rock-bottom target for bond yields at a time when the Federal Reserve and others are tightening policy. He didn’t mention the exchange rate in his speech. The yen was down 0.3% at 128.79 per dollar as of 12:06 p.m. in New York.

A majority of surveyed economists see the central bank sticking with its policy settings at a meeting next week, even as it updates its forecasts to predict faster gains in consumer prices. Still, a growing number of analysts also expect the BOJ to take action on inflation or the weak yen before the end of the year.

BOJ Must Keep ‘Aggressive’ Easing Even as Yen Drops, Kuroda Says

On the one hand, Japanese consumer spending hasn’t returned to pre-pandemic levels, and there’s no concern about economic “overheating,” Kuroda said. “At the same time, I do not think Japan’s economy is in such a vulnerable situation that additional easing is required.”

Kuroda also said that the BOJ “will continue to commit” to overshooting the 2% inflation target, an approach adopted in 2016.

The BOJ’s stance is a sharp contrast to the Fed’s plans to accelerate rate hikes to tackle inflation. That divergence on policy is driving down the yen and amplifying the higher costs of imported energy and commodities for Japan.

Kuroda says that the cost-push inflation emerging in Japan won’t lead to lasting price growth and is likely to drag on the economy. He says stronger wage gains are needed to generate stable inflation.

For now, the government is looking to deal with the challenge of the weak yen and higher commodity prices by warning against sharp currency moves and offering support to businesses and households squeezed by soaring energy costs. Prime Minister Fumio Kishida is set to unveil new aid measures in the coming days.

Japan’s key consumer price gauge rose to a two-year high of 0.8% in March, according to a government report Friday. It’s forecast to jump toward BOJ’s 2% target from this month thanks to a drop-off in the impact of cell phone fee cuts that have weighed down on overall prices by more than 1 percentage point.

Economists’ Outlook

Private economists expect inflation to run at 1.8% in the year that started in April, followed by a slowdown to 0.9% in the following period. Outside of years affected by sales-tax hikes, any inflation figure beyond 1.2% would mark the fastest gain in 30 years for a nation known for its decades of deflation.

Friday also marked the second day of a four-day round of unlimited bond buying by the BOJ at fixed rates aimed at shoring up its 0.25% cap on 10-year yields ahead of the policy meeting next week.

A global wave of bond selling fueled by the prospect of accelerated rate hikes is putting upward pressure on Japanese yields. So far the central bank has shown it can keep markets in line with its bond purchases.

BOJ Must Keep ‘Aggressive’ Easing Even as Yen Drops, Kuroda Says

Still, the widening gap between U.S. and Japanese yields is helping drive the yen lower, complicating the communications task of both Kuroda and government officials.

The BOJ chief has adjusted his tone slightly after Finance Minister Shunichi Suzuki labeled the weak yen as bad last week. Kuroda said “very rapid yen” moves magnify its negative impact on the economy -- a comment that veered from his emphasis on the weak yen being positive for the overall economy. 

The yen hit 129.40 per dollar earlier this week, its weakest since 2002. Surveyed BOJ watchers said the bank would adjust its policy or communications if it tops the 130 mark.

©2022 Bloomberg L.P.