Sticky inflation and yen depreciation shape BOJ policy rate discussions
Bank of Japan Policy Board members discussed the need for continued monetary accommodation adjustments at their January 22-23 meeting. Opinions highlighted moderate economic recovery, persistent inflation, and the impact of yen depreciation.
Economic recovery and inflation's persistent climb
Japan's economy has recovered moderately, though some weakness persists.
The outlook anticipates continued moderate growth, bolstered by recovering overseas economies, government stimulus, and accommodative financial conditions.
Global economic momentum is expected to shift towards recovery this year, driven by widespread accommodative policies and increasing AI-related investment.
While energy and food price increases are projected to decline gradually, leading to positive real wage growth, underlying consumer price index (CPI) inflation is likely to continue its moderate rise.
This trajectory is expected to align with the 2 percent price stability target in the latter half of the projection period, with overall risks to prices generally balanced.
The yen's depreciation, however, presents a nuanced challenge, boosting large firms' profits but potentially widening inequality by impacting small and medium-sized firms and pushing up prices.
Wage pass-through and currency's price impact
The pass-through of personnel expenses to prices has been moderate in many sectors, partly due to households' limited financial leeway.
Rising housing rents, especially in urban areas, reflect increased demand and higher material/personnel costs, warranting close attention due to their impact on household well-being.
Firms' price-setting behavior has significantly changed, with the pass-through of higher import prices due to yen depreciation becoming more pronounced.
Further yen depreciation could slow the decline in CPI or even cause it to rise.
With labor supply constraints and fiscal expansion, upside risks to prices have become more skewed, making foreign exchange rates a critical factor.
Urgent need for policy calibration
Despite the recent December rate hike, financial conditions remain considerably accommodative, with real interest rates at significantly low global levels.
Given the steady approach of underlying price trends towards 2 percent and the yen's depreciation reflecting fundamentals, timely and appropriate policy rate adjustments are imperative.
The Bank of Japan must continue to raise the policy interest rate at appropriate intervals, carefully assessing impacts on firms and households, to avoid falling behind the curve.