Japan government to revise accord with BOJ to make price target flexible
The Japanese government is set to revise a decade-old accord with the Bank of Japan that states the central bank will aim to achieve its 2 percent inflation target “at the earliest possible time,” government sources said Saturday.
In the first review since the joint agreement was made in 2013, the government will consider making the price goal more flexible, the sources said. Prime Minister Fumio Kishida is expected to work out details with the next BOJ governor, who will succeed Haruhiko Kuroda in April.
The envisaged revision could lead the BOJ to tweak its bold monetary easing as the side effects of its ultralow interest rate policy, most notably the yen’s sharp depreciation against other major currencies, have become more evident and pose a challenge for the Kishida administration.
Under Kuroda, the BOJ remains committed to keeping borrowing costs at rock-bottom levels for households and businesses to support the economy, swimming against the global tide of monetary tightening.
The joint statement, which mentions the roles of the government and BOJ to support economic growth, is widely seen as forcing the bank to stick to its inflation goal. The revision is aimed at widening policy options for the BOJ, according to the sources.
But the government and BOJ are of the view that monetary easing is still necessary. They assess that although the Japanese economy is no longer in a state of deflation, it has yet to enter a virtuous cycle of price hikes and wage growth.
To prevent the review from being construed by markets as a departure from monetary easing — a development that could lead the yen to spike and Japanese government bond yields to jump — the 2 percent inflation target itself will be maintained, the sources said.
Possible changes would include dropping the expression “at the earliest possible time” or changing the accord’s wording to clarify that the 2 percent target should be attained over the mid- to longer term.
Promoting wage growth could be added to the revised document as a challenge for the government.
Kuroda has publicly denied his intention of staying on as governor beyond his current term ending April 8, 2023. Kishida needs to select a candidate to succeed Kuroda for parliamentary approval.
Masayoshi Amamiya and Hiroshi Nakaso, current and former BOJ deputy governors, are among the likely potential candidates.
The current joint statement was issued on Jan. 22, 2013 when Kuroda’s predecessor Masaaki Shirakawa was governor, and the BOJ, under pressure from the government, decided to introduce the 2 percent price stability target.
Based on the bank’s projections, core consumer prices in Japan will gain 2.9 percent from a year earlier in fiscal 2022, but the rise will slow to 1.6 percent in fiscal 2023 starting April.
Still, core consumer prices in Japan, the key gauge of inflation, have stayed above the BOJ’s 2 percent target for seven months, driven by higher energy prices and a feeble yen.
To ease the pain of higher prices amid Russia’s war in Ukraine, Kishida’s government has taken inflation-relief steps, and has stepped into the currency market on multiple occasions this fall to stop the yen’s sharp drop, which inflates import costs for resource-poor Japan.
Kuroda has maintained that cost-push inflation will be temporary and that the BOJ should maintain its ultralow rate policy to support the economy, making it an outlier among major central banks that have begun hiking interest rates.