Government to revise agreement with BOJ to make price target flexible

The Japanese government will revise a decades-old agreement with the Bank of Japan that says the central bank will aim to meet its 2 percent inflation target “at the earliest opportunity,” government sources said on Saturday.

In the first review since the joint deal was finalized in 2013, the government will consider making the price target 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 planned overhaul could prompt the BOJ to fine-tune its bold monetary easing as the side effects of its ultra-low interest rate policy, particularly the yen’s sharp depreciation against other major currencies, have become clearer and pose a challenge to the Kishida government.

Under Kuroda, the BOJ remains committed to keeping borrowing costs low for households and businesses to prop up the economy and swim against the global tide of monetary tightening. The joint statement, which mentions the government and BOJ’s role in supporting economic growth, is widely seen as forcing the bank to stick to its inflation target. According to the sources, the revision aims to expand the policy options for the BOJ.

However, the government and the BOJ believe that monetary easing is still necessary. They estimate that while the Japanese economy is no longer in a state of deflation, it has not yet entered a virtuoso cycle of price hikes and wage growth.

To prevent the review from being interpreted by markets as a move away from monetary easing – a development that could lead to a rise in the yen and Japanese government bond yields – the 2% inflation target will remain in place, the government said Sources.

Possible changes would be to delete the phrase “as soon as possible” or to change the wording of the agreement to clarify that the 2% target is to be achieved in the medium to longer term. Stimulating wage growth could be included in the revised document as a challenge for the government.

Kuroda has publicly denied his intention to remain as governor beyond his current term, which ends on April 8, 2023. Kishida must select a candidate for parliamentary approval to succeed Kuroda.

Masayoshi Amamiya and Hiroshi Nakaso, current and former Deputy Governors of the BOJ, are among the likely potential candidates.

The current joint statement was made on November 1, 2013, when Kuroda’s predecessor Masaaki Shirakawa was governor, and the BOJ, under pressure from the government, decided to introduce the price stability target of 2 percent.

At the time, then-Prime Minister Shinzo Abe had urged Shirakawa to agree to the 2 percent target despite the governor’s reservations. Shirakawa resigned in March before his term expired.

Abe selected Kuroda, a former top Japanese currency diplomat who served as president of the Asian Development Bank, to succeed Shirakawa. Kuroda then began bold monetary easing, a key element of Abe’s Abenomics economic stimulus program.

After around a decade of ultra-loose monetary policy under Kuroda, the inflation target still needs to be “stable and sustainable” as described by the BOJ.

Based on the bank’s forecasts, core consumer prices in Japan will rise 2.9 percent year-on-year in fiscal 2022, but the increase will slow to 1.6 percent in fiscal 2023 from April.

Still, core consumer prices in Japan, the key indicator of inflation, have been above the BOJ’s 2% target for the past seven months, reflecting higher energy prices and a weak yen.

To ease the pain of higher prices amid Russia’s war in Ukraine, the Kishida government has taken anti-inflationary measures and has entered the foreign exchange market several times this fall in an attempt to stem the yen’s sharp fall, which is driving down import costs for the country resource-poor Japan is booming.

Kuroda has claimed that cost-push inflation will be temporary and that the BOJ should maintain its ultra-low interest rate policy to support the economy, making it an outlier among major central banks that have started raising interest rates.


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