Photo/Illutration Bank of Japan Governor Haruhiko Kuroda meets reporters in Tokyo on Sept. 22 following a monetary policy meeting. (Pool)

The world’s economic landscape is undergoing radical changes triggered by a global bout of inflation.

Economic policymakers must not allow outdated views to prevent them from making timely responses to these challenges. They need to keep an eye on the ball and stand ready to act with agility and flexibility at any moment.

The U.S. Federal Reserve on Sept. 21 raised interest rates by three-quarters of a percentage point--three times more than the usual hike--for a third straight time. Earlier this month, the European Central Bank also bumped up its benchmark interest rate by 0.75 percentage point.

These strong policy actions signal that the U.S. and European central banks are bent on slaying historically high inflation rates even at the risk of an economic slowdown.

In contrast, the Bank of Japan, in its Sept. 22 policy meeting, decided to stay put on its super-loose policy stance. While energy and food prices are rising also in Japan, core consumer price inflation rates, excluding volatile fresh food items, have remained in the 2 percent range, far lower than the figures for the United States or Europe, where prices are surging at annual rates of more than 8 percent. Wage growth also remains sluggish in Japan.

The BOJ is betting that inflation rates are “almost certain to fall below 2 percent” in next fiscal year onward as energy prices peak out, as Governor Haruhiko Kuroda put it. This view underlies the Japanese central bank’s policy of maintaining its ultra loose monetary policy. With most private-sector economists agreeing with the BOJ’s prognostication, the bank’s policy stance is reasonable for now.

The catch is that the structure of the world economy has drastically changed due to the pandemic and Russia’s invasion of Ukraine. Uncertainty about the global economic outlook has increased sharply.

There is a high chance that global inflationary pressure will grow or remain prolonged, depending on the future course of the U.S. and European economies and Russia’s moves in the coming months. There is no room for Japanese policymakers to be complacent. The BOJ must learn from the costly mistake made by the Fed, which misread steep inflation as a temporary phenomenon.

The acceleration of the yen’s weakening due to differences in monetary policy stance between the West and Japan contributes to push up prices at home.

The government and the BOJ on Sept. 22 stepped into the currency market to shore up the sagging yen by selling dollars for the Japanese currency. It marked the first such market intervention in 24 years. The action will put some pressure on currency speculators who have been betting on the yen’s continued slide. But its effects will be limited as the interest rate gap between Japan and the United States continues to widen.

In setting guidelines for future market operations to control the cost of borrowing in the Sept. 22 policy meeting, the BOJ decided to keep long- and short-term interest rates at current levels (around zero). Kuroda has said he sees no need to change this stance for the time being.

Given that inflation is rising at rates higher than the BOJ’s target of 2 percent due to the unpredictability of the economic climate, the BOJ’s policy bias toward additional easing is not consistent with the overall economic picture. The time has come for the central bank to rethink its guidelines for market operations.

The BOJ has long feared that any sign of change in its extremely easy monetary policy would cause the yen to appreciate.

Now, however, the BOJ itself has said a steep decline of the yen is not desirable. It should start debating steps to respond to the changing situation, including a more flexible approach to monetary accommodation.

How to ensure price stability with wage growth in the current global economic turbulence is a key monetary policy challenge that will test the BOJ’s central banking prowess.

--The Asahi Shimbun, Sept. 24

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