BoJ: No sense of urgency to increase policy easing - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, notes that the BoJ’s Kuroda yesterday said, “The unemployment rate has declined recently to 3 percent, which is virtually full employment.

Key Quotes 

“As for wages, the annual labor-management wage negotiations in 2014 resulted in base pay rises for the first time in two decades; base pay rises have continued for three consecutive years.”

This suggests that Kuroda thinks conditions are at hand that can begin to generate more consistent inflation.  As such, he may not feel compelled to significantly increase monetary policy accommodation.

Kuroda spoke extensively about Japan having largely “adaptive” rather than “forward-looking” inflation expectations.  As such, the recent falls in inflation expectations relates much to the observed lower inflation outcome over the last year due to “the decline in crude oil prices and the temporary weakness in demand”.

On the other hand, these “adaptive” expectations imply that as the dis-inflation from lower oil prices dissipates, expectations will rise again.

As such, to some extent, Kuroda is not panicked by recent low measures of inflation expectations and is prepared to wait for these to rise as more stable to higher oil prices in the last year start to lift observed year-ended inflation.

He said, “Going forward, the underlying trend in inflation is expected to rise as the economy continues to grow at a rate above the potential growth rate and the effects of the decline in crude oil prices are expected to dissipate.”

“Therefore, the observed inflation rate is expected to rise gradually. Under these circumstances, inflation expectations will be pushed up by the “adaptive formation mechanism.”

However, Kuroda is not completely nonplussed by recent low inflation outcomes and low inflation expectations.  He sees risks that these adaptive expectations will not rise much, and he wants to push up inflation expectations by influencing those latent and fledgling forward-looking expectations.

He said, “For the time being, however, the observed inflation rate is unlikely to accelerate, hovering at slightly negative or about 0 percent. As a result, there is considerable uncertainty about the extent to which inflation expectations will rise through the “adaptive formation mechanism.” Against this background, it is imperative for the Bank to firmly maintain its commitment to achieving the price stability target of 2 percent at the earliest possible time from the viewpoint of the “forward-looking formation mechanism.”