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

The Bank of Japan has revised its inflation forecasts upward, predicting that prices will rise close to its target of 2 percent despite uncertainties about the economic outlook.

The central bank needs to have an in-depth debate on how it should adjust its monetary policy to maintain consistency with the changing price picture.

In its latest Outlook for Economic Activity and Prices report published on Jan. 18, the BOJ projected the annual inflation rate will reach 3 percent in fiscal 2022, which ends in March, and 1.8 percent in fiscal 2024.

The forecast for fiscal 2024 reflects the effects of a backlash to government efforts to rein in inflation, but the central bank said price increases could be stronger in that year.

BOJ Governor Haruhiko Kuroda told a news conference on the day that prices will rise because of stronger demand while inflation due mainly to higher prices of natural resources will slow.

“A path of rising prices is becoming visible,” he said.

Given the BOJ’s own price forecasts, coupled with a global upward trend in interest rates, it is no wonder that long-term interest rates in Japan have shown signs of creeping up.

These changes in economic conditions are expected to prompt the central bank to consider an exit strategy from its current aggressive and large-scale monetary easing.

On the other hand, many private-sector economists are forecasting more moderate inflation.

Price trends will be affected by the wage increase agreed upon between labor and management through this year’s “shunto” spring negotiations, which will determine the course of demand.

In both the United States and Europe, there are concerns that rate hikes to fight inflation could lead to an economic downturn.

The situation in Japan does not call for an immediate termination of the BOJ’s ultra-loose monetary policy.

However, given the changing economic and price trends that were not expected even a year ago, it is clear that the BOJ needs to act in a more nimble and flexible manner in adjusting its policy stance.

From this point of view, it is hard to understand why the BOJ decided at its Jan. 18 monetary policy meeting to keep its yield curve control (YCC) targets for long- and short-term interest rates intact in downward directions. 

The decision, which is at odds with the recent movements of long-term rates, could undermine the credibility of the monetary policy.

The YCC approach, introduced seven years ago, was designed to allow the BOJ to make more flexible policy responses to changes in economic, price and financial conditions and raise the sustainability of its policy.

Last month, the central bank unexpectedly widened its target band for interest rates.

But yields on 10-year government bonds have climbed to the new 0.5-percent cap, prompting the BOJ to increase bond purchases sharply to maintain the level.

This strategy should be further studied to ensure flexibility and sustainability of the BOJ’s policy.

The recent inflation trend is changing the long-held perception that prices will not rise in Japan. But it only increases the burden on households unless wages also increase.

This is a critical moment for Japan’s economy as for whether the nation will finally see stable inflation accompanied by comparable pay growth.

The challenge demands finesse and prowess on the part of the BOJ in adjusting its monetary policy.

--The Asahi Shimbun, Jan. 19

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