BOJ in dilemma as inflation lags behind robust economy

Tokyo's Nihonbashi business district in Japan. In recent weeks, a broadly weaker US dollar has added to complications for BOJ's policy as a strong yen risked undermining the economic gains and further delaying an exit from its super easy policies.
Tokyo's Nihonbashi business district in Japan. In recent weeks, a broadly weaker US dollar has added to complications for BOJ's policy as a strong yen risked undermining the economic gains and further delaying an exit from its super easy policies.PHOTO: REUTERS

TOKYO • Japan's inflation in December continued to lag behind a strong economic revival, leaving the central bank in a dilemma as to how to turn off crisis-era stimulus policies that even some of its board members warn will start to hurt more than help if retained for too long.

Adding to the complication over the Bank of Japan's (BOJ) exit-timeline is a recent rise in the yen, which would make it harder to vanquish deflation that has beset the world's third-biggest economy for decades.

Government data yesterday gave little hope on the inflation front, with core prices last month rising 0.9 per cent year on year, unchanged from November. That was well off the BOJ's 2 per cent price goal and argued for its ultra-easy stance to stay for now even as other central banks start to wind back.

All the same, some BOJ board members are getting nervous about keeping policy loose for a prolonged period. They saw room to raise rates or slow purchases of risky assets if the recovery continues, minutes of the December rate review showed. A member said the BOJ would need to consider if adjustments in the level of interest rates would be necessary when economic activity and prices were expected to continue improving, the minutes showed.

Tokai Tokyo Research Institute chief economist Hiroaki Mutou said core consumer inflation may hit 1 per cent temporarily but won't stay there for long as the boost from rising oil costs starts to wane. The core inflation price index includes oil products but excludes volatile fresh food prices. "It will be difficult for the BOJ to start unwinding its monetary policy for a while. Markets have been really nervous about the BOJ's exit strategy and its subtle moves could affect the currency market easily," Mr Mutou said.

Japan has been on the radar of major economies as its massive quantitative easing programme has weakened the yen in a boost to its exporters. However, Tokyo has repeatedly said that these policies are not meant to influence exchange rates.

In recent weeks, a broadly weaker US dollar has added to complications for BOJ's policy as a strong yen risked undermining the economic gains and further delaying an exit from its super easy policies.

The yen has gained more than 3 per cent so far this year, hitting a four-month high of 108.5 yen per US dollar on Thursday.

Japanese Finance Minister Taro Aso said yesterday that major economies have agreed to avoid targeting currency levels for the purpose of trade competitiveness. He said this when asked about comments by US President Donald Trump and Treasury Secretary Steven Mnuchin on the performance of the US dollar, which saw a broad decline over past few weeks.

A Japanese government spokesman also said yesterday the Group of 20 countries have agreed that disorderly currency moves are undesirable.

REUTERS

A version of this article appeared in the print edition of The Straits Times on January 27, 2018, with the headline 'BOJ in dilemma as inflation lags behind robust economy'. Print Edition | Subscribe