OSAKA- Bank of Japan Governor Kazuo Ueda said there was “very high uncertainty” over whether companies would continue raising prices and wages, stressing anew the bank’s resolve to maintain ultra-loose monetary policy.
He also offered a cautions take on the overseas economic outlook, warning of the fallout from aggressive US interest rate hikes and sluggish growth in the Chinese economy.
The key to the outlook for monetary policy is whether strong wage growth and consumption, rather than cost pressures from rising import costs, become the key driver of inflation, Ueda said.
“We’re seeing some signs of change in corporate wage- and price-setting behavior. But there is very high uncertainty on whether these changes will broaden,” Ueda told business leaders in the western Japanese city of Osaka on Monday.
The BOJ maintained ultra-low interest rates on Friday and its pledge to keep supporting the economy until inflation sustainably hits its 2 percent target, dispelling market speculation that rising inflation would soon prod the bank to phase out its massive monetary stimulus.
Ueda said the BOJ was “not fully convinced” that wage hikes would keep accelerating, as many companies seemed undecided on their wage strategy for next year and beyond.
“The policy prescription to deal with inflation varies depending on what is causing the price rises,” Ueda said.
“The cost-push inflation we’ve seen so far hurts companies and households. That’s why we are supporting demand and the broader economy with easy monetary policy,” he added.
While stressing the need to keep ultra-loose policy for now, Ueda said it was “extremely important” to weigh the benefits and costs of its policy.
Japan’s economy grew less than initially estimated in the second quarter and wages slumped in July, casting doubt over central bank projections that solid domestic demand will keep the country on course for a recovery.
Capital expenditure and private consumption both fell in the April-June period, revised gross domestic product (GDP) data showed on Friday, underscoring the fragile state of Japan’s economy, which is already facing headwinds from weakening Chinese and US growth.
Real wages adjusted for inflation fell in July for a 16th straight month in a sign households continued to feel the pinch from rising prices, separate data showed, boding ill for consumption.
“Weak exports to China may be making Japanese manufacturers cautious about investing.
The hope is that service-sector firms will pick up the slack, though sluggish consumption could discourage them to spend money, too,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
Japan’s economy grew an annualized 4.8 percent in April-June, the revised data showed, down from a preliminary estimate of 6.0 percent growth and below market forecasts for a revised 5.5 percent expansion.
The main factor behind the downgrade was a 1.0 percent drop in capital expenditure, compared with a preliminary flat reading, casting doubt on the BOJ’s view that robust corporate spending will underpin Japan’s post-pandemic economy. The revised decline was bigger than a median market forecast for a 0.7 percent fall.
Private consumption, which makes up more than half of the economy, fell 0.6 percent quarter-on-quarter in the April-June period, compared with a preliminary 0.5 percent decline.
Exports remained solid in April-June with net external demand contributing 1.8 percent points to GDP growth, unchanged from the preliminary reading.
But shipments to China slumped 13.4 percent in July to mark the 8th straight month of falls. Overall exports slid 5.0 percent year-on-year in the first half of August after a 0.3 percent decline in July, suggesting the global slowdown was taking a toll on the economy.
As weak domestic demand led to declines in imports, Japan’s current account surplus logged a record amount for the month of July, separate data released on Friday showed.
“I won’t be surprised if Japan suffers two straight quarters of contraction during the rest of this year,” said Minami of Norinchukin. “The chance of an early end to ultra-loose monetary policy is diminishing.”
Japan’s economy has seen a delayed recovery from the COVID-19 pandemic this year, as rising living costs faltering global demand cloud the outlook.
Given such uncertainties, Bank of Japan policymakers have stressed their resolve to keep monetary policy ultra-loose until the recent cost-driven inflation turns into price rises driven by domestic demand and higher wage growth. -Reuters
