On Wednesday, Junko Nakagawa, a policymaker for the Bank of Japan (BOJ) issued a warning about the risks that the fragile economy of the country is facing.
This includes the possibility of household spending taking a hit due to the rise in cost of living, which highlights the need to stick with an ultra-loose monetary policy for now.
However, the fallout from the COVID-19 pandemic appears to be fading and the Bank of Japan will have a discussion in next month’s meeting about whether they need to make changes to their dovish policy guidance.
She said that manufacturers’ profits may have gotten a boost due to a weak yen, but Japanese outputs and exports have taken a hit because of supply disruptions due to China’s zero-COVID policy.
Nakagawa said that as the impact of the pandemic subsides, domestic consumption is on the rise, but the outlook has become clouded because of the fallout from rises in the price of daily necessities.
She said that the economy could only make a recovery when price rises inflict minimum damage to consumption.
She said in a speech that the basic scenario that projects a moderate rise in consumption is uncertain, as it is backed by a rise in household income and a tight job market.
Nakagawa said that inflation may have been higher than the BOJ’s 2% target for a number of months, but it is not enough for them to withdraw stimulus.
She said that they can only achieve their inflation target through monetary easing in a stable and sustainable manner, combined with wage growth.
The Bank of Japan has been an outlier amongst other major central banks, as it has kept its monetary policy ultra-loose in order to support the recovery of a fragile economy.
As far as the forward guidance of the Japanese central bank is concerned, it has also remained dovish. The bank has pledged to stick to current rates or go lower.
As a matter of fact, it even talked about increasing stimulus, if required, and keeping an eye on the impact of the COVID-19 pandemic.
The next meeting
The Bank of Japan (BOJ) has its next meeting scheduled for September 21st and this is when it will decide whether it should end a loan program starting during the pandemic, which is scheduled to end in September.
There are some analysts who think the central bank may also tweak its forward guidance and should it end the loan program, it could also remove reference to the fallout from the pandemic.
However, Nakagawa stated that the decision of the BOJ to make changes to its forward guidance was not connected to the fate of the loan program.
She said that they would take the price and economic developments into account at the time of the meeting and then discuss the language to be used for forwarding guidance.
There was a 2.4% rise in core consumer prices in Japan in July as compared to last year, due to raw material and fuel prices.
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