Japan maintains stimulus despite inflation concerns

The Bank of Japan must continue its current monetary stimulus to generate long-term gains in prices, business profits, employment, and wages.

This was revealed to Reuters by deputy governor Masayoshi Amamiya, who dismissed rumours about an early withdrawal from accommodative settings.

Although inflation in Japan is considerably below levels seen in the US and elsewhere, the BOJ is trailing far behind other major central banks in reducing crisis-mode stimulus.

Nevertheless, rising global commodity prices and a falling yen have fuelled cost-push inflation, fueling investor concern that the BOJ may abandon its present stimulus program.

What BOJ is saying

Masayoshi Amamiya shrugged off the chance of an early exit from the stimulus policy. “What’s important is to continue our powerful monetary easing to firmly support economic activity of companies and households,” Amamiya told lawmakers.

If monetary support is eliminated suddenly, the economy will face downward pressure, making 2 percent inflation even more elusive, according to Amamiya.

The Ministry of Finance, which is responsible for currency policy, holds foreign reserves worth $1.35 trillion that it can use when needed for currency intervention through the BOJ, Suzuki said, without elaborating.

What you should know

  • Today, Japan appears to be experiencing the wrong type of inflation. The goal of the BOJ Governor, Haruhiko Kuroda, was to establish a so-called demand-driven virtuous cycle in which higher-paid workers go out and spend more, increasing demand, leading to additional investment and, eventually, greater salaries.
  • Instead, rising overseas costs will raise prices and cause customers to buy fewer items, not more. The situation is particularly acute in resource-scarce Japan, where almost all raw materials and commodities are imported.
  • This comprises more than 60% of total food consumption and over 95% of total energy consumption, primarily through oil imports. With fairly calm global commodities markets over the last decade, this has not been a major concern until now, but wheat and natural gas are both in the crosshairs as a result of Russia’s invasion of Ukraine, and the problems are expected to worsen.
  • So far, the figures have been modest by worldwide standards. While the US Consumer Price Index increased by 8.5% year on year in March, the highest rate since 1981, Japan’s index increased by only 1.2%.
  • Other figures were eye-popping by Japan’s standards. Energy costs jumped 20.8%, the steepest rise since 1981, while cooking oil increased 34.7%. Another measure of inflation at the wholesale level, the Corporate Goods Price Index jumped 9.5% year-on-year in March, due in part to the dire situation in Ukraine.

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