The Bank of Japan will maintain ultra-low rate policy amid heightened uncertainty over the global economy caused by policy tightening in other economies, keeping the impact on financial markets of overseas rate hikes in check, it said Monday. Governor Haruhiko Kuroda.
In a speech to business leaders in the central city of Nagoya, Japan, Kuroda said a recent rise in inflation, driven primarily by rising commodity prices and weakening yen, will not be supported, even if the nation has witnessed a broadening of price hikes by companies.
The central bank said its 2% inflation target should be achieved in a stable and sustainable way, supported by robust wage growth. Although the main inflation figure in Japan has exceeded that threshold in recent months, Kuroda ruled out the possibility of a rise in short-term interest rates as inflationary pressure is expected to ease.
“At the moment, the Bank of Japan believes it should continue with monetary easing and thus firmly support economic activity,” Kuroda said in his speech.
“In doing so, it aims to provide a business-friendly environment to raise wages and achieve the goal of price stability in a sustainable and stable way, accompanied by wage increases,” he said.
As the monetary policy of the BOJ, partly accused of accelerating the sharp decline in the yen in recent times, has come under closer scrutiny, Kuroda stressed the need to maintain the existing policy framework to promote wage growth, a factor key to achieving inflation supported by strong demand.
Monetary tightening in advanced economies like the United States and the euro zone has raised concerns about a global economic slowdown. Kuroda said there is a need to “closely monitor” the impact of such moves, including asset price adjustments and capital outflows from emerging economies.
Market participants have been on alert for any signs of a slowdown in policy tightening. In recent days, the yen has risen sharply against the US dollar, reversing its steep decline to the lows of the past three decades as markets expect the Federal Reserve to be less aggressive in raising interest rates.
“The government has intervened several times in the foreign exchange market and the abnormally one-sided and rapid weakening of the yen seems to be taking a break. I think that, in itself, is a very good thing,” Kuroda told a news conference after his. intervention.
“Commodity prices have already started to fall and the strong dollar will not last forever. Under such circumstances, it is certain that the impact of higher import costs will decrease,” he added.
Most of the recent surge in consumer price inflation came as companies passed on rising import costs, inflated by the weaker yen.
While the yen’s rapid decline created headaches for resource-poor Japan, the economy likely grew in the July-September quarter, albeit at a much slower pace than in the previous three months.
The BOJ chief said the economy will be helped by the emergence of demand that had been depressed by the COVID-19 pandemic and a resumption of inbound tourism in the future.
For the economy to see stronger demand, wage growth will be key as the recent wave of inflation is weighing on consumer sentiment.
Prime Minister Fumio Kishida calls on companies to offer wage increases that can keep pace with accelerating inflation when wage negotiations for the management of jobs begin early next year.
“The price increases to date are likely to be reflected to a considerable extent in the results of the upcoming spring annual wage negotiations for labor management,” said Kuroda, noting that wage developments should be closely scrutinized.