Photo/Illutration Bank of Japan Governor Haruhiko Kuroda speaks at a news conference in Tokyo on March 18. (Pool)

The world economy is facing a major transitional phase.

Japan should be on the lookout for possible repercussions on its economy and accelerate efforts to create a virtuous cycle of growth driven by wage hikes.

The U.S. Federal Reserve decided at a March 16 policy meeting to raise interest rates for the first time in more than three years.

It ended its policy of keeping its benchmark interest rate anchored near zero to deal with the novel coronavirus crisis and is poised for a series of rate hikes over the next two years.

The Fed’s switch to monetary tightening has been prompted by a sustained rise in prices.

Many observers initially viewed the increase as a temporary phenomenon caused by recovery from the slump triggered by the pandemic.

But prices have continued rising for an extended period and inflation rates have reached the highest levels since the 1980s. Wages have also picked up in a growing swath of the U.S. economy.

The Russian invasion of Ukraine, which started in late February, has generated additional upward pressure on energy and food prices in international markets.

Despite many uncertainties, the U.S. economy is growing briskly. The Fed is probably on the right track with focusing on curbing inflation for the time being to keep the economy on an upward trajectory.

Inflationary pressures are also building in Japan.

The corporate goods price index, a measure of prices of goods traded among companies, has posted a nearly 10 percent increase over the previous year.

Consumer price inflation is also warming up and could reach the Bank of Japan’s target of 2 percent in April or after as the effects of cuts in mobile phone rates wear off.

The yen is gradually weakening on expectations that differences between Japanese and U.S. interest rates will widen due to U.S. interest hikes, which is accelerating the rise in prices of Japanese imports.

The BOJ decided at a March 18 policy meeting to maintain its ultra-loose monetary policy.

BOJ Governor Haruhiko Kuroda defended the decision at a news conference.

He said even if the inflation rate hits 2 percent, it will be unnecessary and inappropriate to tighten monetary policy as long as the rise is mostly due to higher prices of imports such as energy.

Kuroda also reiterated that the yen’s depreciation is a positive development for the Japanese economy as a whole.

Indeed, the economic situation in Japan is clearly different from that in the United States, where the inflation rate has surged to around 8 percent. The BOJ has good reason to adopt a policy stance different from the Fed’s.

Moreover, there is no quick fix for the strained global supply chain.

But much steeper inflation and a sharply weaker yen would increase the financial burdens on some companies and households and could amplify the negative effects on the entire Japanese economy.

As a major energy importer, Japan can take a massive hit from a decline in terms of trade, such as the rise in oil and gas prices, which will cause an outflow of wealth from the nation.

The BOJ should keep a close watch on price trends and weigh policy options for flexible responses to significant changes in the situation.

Boosting the Japanese economy’s resilience to inflation requires steady wage increases to ramp up household income.

Some encouraging signs have emerged from the ongoing “shunto” spring wage talks between labor and management. Many major companies have agreed to fully grant the wage demands of their labor unions.

While employers’ willingness to raise wages is a welcome trend, the average increase in base pay is around 0.5 percent, lower than the expected inflation rate. Pay growth should be further expanded through negotiations in the coming weeks.

--The Asahi Shimbun, March 20

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