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BOJ walks fine line as it faces the wrong kind of inflation

  • March 19, 2022
  • , Nikkei Asia , 7:08 a.m.
  • English Press

TAKERO MINAMI, Nikkei staff writer


TOKYO — The Bank of Japan will stay the course on monetary easing even as it predicts inflation will approach its 2% target in April, with costlier commodities and a weak yen doing more to raise consumer prices than years of BOJ efforts.


“There are extremely high uncertainties over how the situation surrounding Ukraine will affect Japan’s economic activity and prices,” the BOJ said in a statement following its policy meeting Friday.


The BOJ has sought to stoke healthy price growth by swelling Japan’s money supply. But Japan’s recent uptick in inflation stems from supply uncertainty overseas, not from an economic recovery at home, meaning Japan is essentially bleeding money.


Supply concerns after Russia’s invasion of Ukraine drove U.S. crude oil futures to over $130 a barrel earlier this month, the highest point since the summer of 2008, although some of these gains have ebbed. Copper, aluminum and wheat prices have jumped as well.


Japan’s corporate goods price index, which measures inflation in business-to-business transactions, logged its largest increase in 41 years last month, and is expected to continue rising in the coming months.


Despite the outlook for inflation, the BOJ stood pat on its monetary easing Friday. “It is not necessary or appropriate to tighten our monetary policy,” BOJ Gov. Haruhiko Kuroda told reporters.


But there are indications that sticking to its monetary easing may not provide the economic support the BOJ intends.


In response to growing inflationary pressures, the U.S. Federal Reserve raised its benchmark rate on Wednesday after keeping it near zero for two years. The Bank of England on Thursday raised interest rates for the third straight meeting.


A divergence in interest rates in turn is pushing the yen down. The currency weakened to over 119 yen to the dollar at one point following Kuroda’s Friday remarks, hitting its softest level in over six years.


Kuroda has repeatedly stressed that a weak yen benefits Japan’s economy as a whole. But a weak home currency means higher prices for crude, grains and other imported commodities, which squeeze businesses and households.


Japan could suffer a 14 trillion yen ($118 billion) outflow of income per year with crude at $120 a barrel and an exchange rate of 115 yen to the dollar, according estimates by Daiwa Securities. This would represent the largest outflow since the mid-1990s, and could dent gross national income by roughly 2.6% and real economic growth by about 1 percentage point.


Real wages shrank in Japan toward the end of last year, and have remained roughly flat since the beginning of this year. Kuroda said companies have been agreeing to raise their pay in annual negotiations with labor unions. But this would not lead to an increase in real household income unless the raises outpace inflation, which some at the BOJ expect to top 2% toward the summer.


High commodity prices have dealt a blow to Japan’s economy in the past. Surging crude accelerated inflation to around 2.5% in 2008. During the oil crisis in the 1970s, rapid inflation resulted in Japan’s first economic contraction since World War II.


Kuroda’s current term as head of the BOJ ends in April next year. With an upper house election coming this summer, he could pressure to tame inflation from households and companies unused to rising prices.

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