BoJ will maintain an ultra-lax policy

The new Governor of the Bank of Japan (BoJ), Kazuo Ueda, stated that, for now, it is appropriate to maintain the ultra-loose monetary policy, since inflation has not yet reached 2% as trend, giving to understand that he is in no hurry to reduce his enormous stimulus.

However, Ueda said that the BoJ should avoid being too late in normalizing monetary policy, a sign that it will be more open than its predecessor, Haruhiko Kuroda, to the idea of ​​modifying its controversial policy of monitoring yields. bonds.

“If the Bank of Japan suddenly realizes that inflation will stably and sustainably reach 2% and decides to normalize monetary policy, it will have to make very large policy adjustments,” Ueda said at his first press conference yesterday.

“This will cause major disruptions in the economy and markets, so it is important to take preventive and appropriate decisions,” he added.

Although there are increasing signs that inflation is heading sustainably towards the Bank of Japan’s 2% inflation target, more time is needed to see whether wages will continue to rise, he said.

“In view of the current economic, price and financial developments, it is convenient to maintain control of the yield curve for now,” said Ueda.

There is speculation in the markets that the BoJ will soon remove yield curve control, a policy that limits 10-year bond yields to around zero, due to growing criticism that it distorts markets and hurts bank margins.

“Ueda pointed out that inflation and economic conditions do not justify a large interest rate hike… The possibility of a monetary policy tightening in April has diminished significantly,” said Shingo Ide, chief equity strategist at NLI. Research Institute.

If the Bank of Japan sees that it can hit its price target, it may have to normalize monetary policy, Ueda added. “If not, we may have to come up with a more sustainable framework with an eye on the side effects of monetary easing.”

Ueda faces a bumpy road as slowing global growth clouds prospects for a sustained rebound in inflation and wages, a prerequisite for phasing out his predecessor’s controversial monetary stimulus.

The growing fear of a recession in the United States is one of the headwinds of the Japanese economy, so dependent on exports. Although the end of the Covid-19 restrictions props up consumption, some analysts warn that the recent series of price hikes may also hurt spending.

Ueda said he was aware of the side effects of prolonged easing and stressed the need to ensure the soundness of the Japanese banking system.

Japan’s long-stagnant inflation and wage growth are beginning to show signs of picking up. After hitting its highest level in 41 years (4.2%) in January, core consumer price inflation remains above 3% as more companies raise prices in response to rising commodity costs cousins.

To compensate households for the rising cost of living, big companies have offered wage increases of nearly 4% this year in annual labor negotiations, the fastest pace in three decades.