DAICHI MISHIMA, Nikkei staff writer
TOKYO — A controversial remark by Bank of Japan Gov. Haruhiko Kuroda has made waves across the country, as some consider it a subtle message that the central bank may be starting to explore an eventual end to its large-scale monetary easing.
It all began with a June 6 speech at a Kyodo News-organized event where he said that “Japanese households’ tolerance of price rises has been increasing.”
Kuroda turned to a survey by University of Tokyo economics professor Tsutomu Watanabe to illustrate his point. When asked how they would respond to a 10% price hike at the supermarket they frequent, more Japanese households said they would “accept the price increase and continue to buy the same amount at the same supermarket” than in a previous survey, Kuroda said.
Japan’s consumer price index rose more than 2% on the year in April, meeting the BOJ’s target for the first time in more than seven years. But this is widely considered a result of rising energy prices and other temporary factors.
Supply-side constraints due to the recent lockdowns in China pose risks for a Japanese economy that has struggled to fully bounce back from the coronavirus. “The top priority for the bank is to persistently continue with the current aggressive monetary easing,” Kuroda said, reiterating the BOJ’s official position that a debate on scaling back would still be premature.
Such speeches are carefully drafted ahead of time by the BOJ’s Monetary Affairs Department, which is responsible for crafting the bank’s policies. The June 6 remarks were no different. The term “tolerance,” despite triggering backlash this time around, had also been used by the BOJ on multiple occasions before.
Kuroda did not need to touch on price increases if he had simply been interested in justifying continued easing by the BOJ. Rather, his true aim was “probably to lay the groundwork toward normalizing monetary policy,” a source at the central bank said.
Watanabe’s survey suggested that a series of corporate price hikes have shifted how Japanese consumers view price levels. Kuroda’s prepared speech included a section labeled “Signs of Changes in Inflation Expectations.”
But Japanese wages have not kept up with inflation. Cash earnings per capita fell 1.2% on the year in real terms this April, according to the government’s Monthly Labor Survey. In his speech, Kuroda hypothesized that so-called forced savings from pandemic restrictions may have led to a higher tolerance for price hikes.
The question is how Japan, “while households are acceptant of price rises due to factors such as forced savings, can maintain a favorable macroeconomic environment to the extent possible and make this lead to a full-fledged rise in wages,” he said.
Kuroda later backpedaled on his remarks. At a Monday meeting of the upper house Budget Committee, the governor said he understood that “households are being forced to make the difficult choice to accept” higher prices.
The earlier comment was “not appropriate,” he said.
At first glance, the remark that Japanese people are tolerant of price hikes appears at odds with the BOJ’s plan to maintain monetary easing. If public attitudes toward prices are changing, then the goal of stable 2% inflation can be achieved by a positive feedback loop between inflation and higher wages.
As the world’s largest holder of Japanese government bonds, the BOJ is hard-pressed to signal plans to scale back its monetary easing, which would lead to falling prices for the bonds. Still, central banks in developed economies normally engage in a dialogue with the market to give it a heads-up before a policy change. The BOJ is also making efforts to communicate its views to the outside world.
Kuroda will end a decade leading the BOJ next April. Japan is not expected to achieve his goal of a sustained and stable inflation rate of 2% before then.
“It is true that we’d hoped to finally put an end to our yearslong fight against deflation,” a BOJ source said. The bank now faces the challenge of maintaining 2% inflation with wage increases so that it can start taking steps toward normalizing its monetary policy.
To get there, the central bank has a needle to thread.