Broadening price rises in Japan prompted some central bank policymakers to warn last month that inflation may overshoot expectations, highlighting the challenge Governor Haruhiko Kuroda faces in justifying ultra-low interest rates.
One board member went as far as saying the Bank of Japan (BOJ) must eventually communicate an exit strategy from ultra-easy policy, a summary of opinions at the September meeting showed.
While many opinions called for the need to keep monetary policy ultra-loose to support the fragile economy, the comments highlight a gradual shift in the balance of the BOJ board once dominated by proponents of aggressive easing.
“There’s a risk consumer inflation may deviate significantly upward from our baseline scenario, partly due to the impact of exchange-rate moves. This needs to be examined humbly and without any preconceptions,” one board member was quoted as saying in the summary, released on Monday.
“Companies continue to announce plans of price hikes against the background of higher raw material costs. Price rises are likely to continue for a wide range of products,” according to another opinion shown in the summary.
At the Sept. 21-22 meeting, the BOJ maintained ultra-low interest rates and its guidance pledging to keep monetary policy ultra-loose until inflation stably achieves its 2% target. It was the first meeting for two newcomers, who in July replaced a former commercial banker Hitoshi Suzuki and dovish economist Goushi Kataoka.
The BOJ remains an outlier among a global wave of central banks tightening monetary policy to combat soaring inflation, which has pushed the yen to 24-year lows against the dollar.
“A majority of the board seemed to believe that while price rises are broadening, it’s unclear yet whether this will lead to sustainable wage gains crucial to achieving the price target,” said Ayako Fujita, chief Japan economist at JPMorgan Securities.
“But compared with July, there seems to be a change emerging within the board on how they see the price and wage outlook. The key for the BOJ’s policy outlook would be whether such views become more widely shared,” she said.
At the September meeting, one member pointed to concern held among some market participants over distortions in bond market functioning, driven in part by the BOJ’s huge bond buying.
“At some point in the future when the timing is appropriate, it’s important for the BOJ to properly communicate with markets an exit strategy,” the member was quoted as saying.
Japan’s core consumer inflation hit 2.8% in August, exceeding the BOJ’s 2% target for a fifth straight month as price pressure from raw materials and the weak yen broadened.
A quarterly survey released on Monday showed companies project inflation to stay at or above 2% for the next five years, casting doubt on the BOJ’s forecast that recent price rises will be short-lived.