Economic Crisis
Bank of Japan June Meeting Summary Shows Members Agree High Costs Hurting Consumers.
Bank of Japan board members noted that high costs of living are hurting consumer spending but they appeared divided over how to proceed with another rate hike as part of its policy normalization. With one member calling for an early action while others urging caution, according to the summary of the bank’s June 13-14 meeting released Monday.
One of the nine members said that “upside risks to prices have become more noticeable” and that those risks “have affected consumer sentiment.” Ahead of the next meeting, the member urged the board to monitor data closely and “raise the policy interest rate not too late” as the likelihood of achieving the 2% price stability target increases.
But there was more cautious voices. “Any change in the policy interest rate should be considered only after economic indicators confirm that, for example, the CPI inflation rate has clearly started to rebound and medium- to long-term inflation expectations have risen,” another member said.
A third member pointed to downside risks to growth, saying that private consumption lacks momentum and there have been successive unexpected suspensions of shipment at some automakers over safety concerns. “As the bank needs to assess the effects of these factors, it is appropriate that it continue with the current monetary easing for the time being.”
On the impact of the weak yen, one member said it could increase the upside risk to the bank’s inflation outlook, and in this context, “the risk-neutral level of the policy interest rate should rise.”
Another member reminded that monetary policy is conducted based on an assessment of the trend in prices and underlying wage developments. “It is not determined by short-term developments in foreign exchange rates,” the member said.
On how the bank should trim its large financial asset holdings, which have killed normal functions of the bond market, one member called for a “gradual” approach, warning that a reduction in the pace of the bank’s purchases of Japanese government bonds “could push down the economy, depending on the timing of the start and the scale of the reduction.”
From the viewpoint of setting an optimal pace of reduction, “the bank should take some time to discuss the plan carefully, including by communicating with market participants,” another member said.
A third member noted that reducing the bank’s balance sheet “is to reduce its increased involvement in the market without exerting disturbing effects on it, and this should be conducted separately from monetary policy.”
Governor Kazuo Ueda told a post-meeting news conference on June 14 that the bank “will not use” the reduction as an “active” monetary policy adjustment tool. “Monetary policy adjustment will be done mainly through short-term interest rates,” he said.
At its June meeting, the nine-member board decided in a unanimous vote to hold the overnight interest rate target steady in a range of 0% to 0.1% for the second straight meeting after conducting its first rate hike in 17 years and ending the seven-year-old yield curve control framework in March.
The board also decided in an 8 to 1 vote to set the stage for gradually reducing the bank’s large holdings of various financial assets for the next year or two years “to ensure long-term interest rates would be formed more freely in financial markets.” It will work out a specific plan at its July 30-31 meeting after bank officials have compared notes with market participants.
