The Bank of Japan is expected to hold fire on further stimulus at its latest monetary policy meeting, despite very soft inflation figures for January. The meeting is expected to conclude just after noon local time (0300-0400GMT), which is usually followed by a press conference from governor Kuroda a few hours later.
Despite the best efforts of the BoJ back in October to offset the impact of falling oil prices on inflation by ramping up stimulus, consumer prices only increased 0.2% in the year to January once the effects of the sales tax are taken out of the equation. This is clearly well below the BoJ’s 2% inflation target, so why isn’t the bank going to ease further this time around?
There are two main reasons why the bank is content to leave policy untouched at the moment. Firstly, Kuroda told the world at the end of February that “the BoJ won’t respond to oil price moves themselves but will closely monitor how they affect inflation expectations”. This basically means that the bank won’t respond to short-term fluctuations in prices but will act if inflation expectations are materially weakened over the long-term. Secondly, the BoJ likely wants to see the results of this springs wage negotiations before committing to further easing.
Wage inflation remains the missing ingredient
Wage inflation is key to ensuring that prices increase in other parts of the economy. In fact, it’s so important it led a professor from the University of Tokyo to state that the BoJ should drop its inflation target in favour of a ‘wage target’. In other words, the bank should publicly state that it is attempting to increase wages, as opposed to push up overall prices.
While the idea of targeting wages directly is unlikely – it would require a change of an agreement between the BoJ and the government from 2013 – it’s not without merit. Without increased wages consumption isn’t going anywhere, and the idea of higher consumer prices probably isn’t very inviting to the average person in Japan. There has been some progress on wage growth in recent months, but not nearly enough.
At today’s policy meeting we expect Kuroda to restate his commitment to spurring inflation, while also adding that the bank will not act based on short-term fluctuations in prices. This isn’t telling us anything new, thus the reaction of the market should be fairly limited this time around. Although, the promise of further stimulus or if Kuroda isn’t his usual upbeat self it may lead to a sell-off in the yen.