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Governor Ueda Kazuo has indicated that the current monetary policy will be sustained in the event that the economic growth and inflation predictions of Japan are correct. These remarks affirm a gradual turning point in the central bank’s approach after many years of very loose policy.
In his
recent speech, Ueda hinted that the era of emergency stimulus packages by the BoJ
was over. Instead, they are focusing on wages, consumer prices, and overall
demand and considering what to do next if these factors continue improving.
Why the
Bank of Japan Is Still Tightening
The country
fought deflation for so long that it became one of the few remaining central
banks with negative interest rates. However, this changed at the beginning of
this year when it made a momentous decision to discontinue its negative rate
policy.
Currently,
Ueda talks about future actions depending on whether there will be a stable
increase in prices supported by real wage growth. Although Japan has
experienced an increase in prices above the 2% target set by the BoJ for a long
time now, this has been attributed to increased costs of imports as well as
stronger corporate pricing power.
The main
issue is whether salaries will rise at the same pace so that households can
feel secure enough to spend their money.
Ueda noted,
“If the outlook holds, adjusting policy further would be appropriate,” which
shows that normalisation is still ongoing.
Markets
React With Caution
Although
financial markets are responding seriously to Ueda’s comments, they are not
panicking. The yen remains volatile as traders assess whether there will be any
more increases given that conditions are still looser than those in America or
Europe.
Bond yields
have slightly gone up due to expectations of slow tightening among investors, while Japanese equities have mostly ignored his statement. Many investors
perceive controlled rate hikes as indicative of economic strength rather than
posing any danger.
How Japan
Differs From Other Central Banks
The BoJ does
not rush to reduce interest rates, unlike its counterparts such as the Federal
Reserve or the European Central Bank. It is slowly undoing stimulus measures
adopted over the years when there was low growth and poor inflation data. This
sets Japan apart timewise, even though other central banks are discussing about
easing.
Ueda has
always emphasised that policy decisions will depend on data and not be hurried.
The central bank is keen on preventing inflation from going too high while at
the same time ensuring that it does not cut short a fragile economic recovery.
What Comes
Next
Most
economists predict slow incremental increases with extended breaks between each
one. The BoJ will probably wait until there is continuous growth in wages and
stable inflation before making another move.