BoJ to continue monetary easing to achieve its 2% inflation target

The Bank of Japan (BoJ) will continue monetary easing to achieve its 2 per cent inflation target accompanied by wage hikes in a sustainable and stable manner, new deputy governor Shinichi Uchida said on Wednesday.

The comment followed Ueda’s view earlier that it was appropriate to maintain the central bank’s ultra-loose monetary policy for now as inflation has yet to sustainably meet its 2 per cent target.

Ueda’s repeated pledge to stand pat on policy may dim any expectations for reversing the BoJ’s easy money stance anytime soon, particularly when global markets remain jittery about the risk of contagion from US and European banking sector troubles.

Uchida said Japanese financial institutions are equipped with sufficient capital and fund-raising bases, making any impact from Western banking problems since March “limited.”

Uchida was reading a speech at an annual gathering of trust associations on behalf of Governor Kazuo Ueda, who is travelling to Washington to attend the International Monetary Fund (IMF) and World Bank group’s spring meetings.

“The pace of price hikes is expected to slow towards the middle of this fiscal year due to government steps to curb energy prices and as the effects of companies passing on costs wane,” Uchida said.

“The BOJ will continue with monetary easing so as to achieve the price stability target in a sustainable and stable manner, while supporting the economy together with wage hikes.”

More Japanese households are expecting prices to rise a year from now, a BOJ quarterly survey showed on Wednesday, raising pressure on the central bank to adjust or ditch its yield curve control (YCC) policy.

The survey, closely scrutinised by the central bank to determine the outlook for inflation, showed that the ratio of Japanese households expecting prices to rise a year from now stood at 85.7 per cent in March, up from 85.0 per cent in December.

On Monday, Ueda also said the BOJ must avoid being too late in normalising policy, a sign that he would be open to tweaking the controversial policy that caps the 10-year bond yield around zero.

Meanwhile more Japanese households are expecting prices to rise a year from now, a Bank of Japan survey showed, reflecting stubborn inflation and heaping pressure on the central bank to adjust or ditch its yield curve control.

Speculation has been rife in markets that the BOJ may soon phase out yield curve control (YCC), a prolonged policy that caps the 10-year bond yield around zero, which has fuelled worries about side-effects and market distortions.

The BOJ’s quarterly survey on households is among data closely scrutinised by the central bank to determine the outlook for inflation.

The survey results will likely keep alive speculation over the BOJ’s moves, given prospects for higher wage growth and broader price hikes that raise living costs for households and businesses.

Although inflation has nearly doubled the BoJ’s 2 per cent target, the central bank has repeatedly said it was not the kind of desirable inflation driven by private demand and wage growth.

Rather, what’s causing prices to rise in Japan is cost-push inflation, it said.

The survey showed that the ratio of Japanese households expecting prices to rise a year from now stood at 85.7 per cent in March, rising from 85.0 per cent in December.

The ratio of households expecting prices to rise five years from now came to 75.4 per cent, versus 76.7 per cent three months ago.

To help households offset the increase in living costs, major firms have offered wage hikes of 3.8 per cent this year in annual labour talks, the fastest pace in about three decades.

The BoJ relies on YCC policy to guide the 10-year government bond yield around 0 per cent as part of efforts to sustainably and stably achieve its 2 per cent inflation target.

Meanwhile the Bank of Japan could help prevent abrupt policy changes later by allowing more flexibility in its bond yield curve control, the International Monetary Fund said in its global financial stability report released.

Under yield curve control (YCC), the BOJ guides the 10-year government bond yield around 0 per cent as part of efforts to sustainably achieve its 2 per cent inflation target.

The central bank’s decision in December to widen the tolerance band around the yield target has heightened market bets of a further near-term tweak or end to YCC.

Changes to the BOJ’s yield control policy may affect financial markets through exchange rates, term premiums on sovereign bonds and global risk premiums, the IMF said.

“While allowing more flexibility in the yield curve control policy could have some repercussions in global financial markets, such a change not only is warranted to meet monetary policy objectives but could also help prevent abrupt policy changes later that could trigger larger spillovers,” the IMF said in the report.