[BOJ] Summary of Opinions: A Small Rate Hike Will Not Have Tightening Effects
BOJ
2024-08-08According to the Bank of Japan's (BOJ) Summary of Opinions at the July 31 Monetary Policy Meeting, several members said that the small rate hike is an adjustment to the degree of monetary easing and will not have monetary tightening effects. Some believe that as the level of the neutral rate seems to be at least around 1 percent, in order to avoid rapid hikes in the policy interest rate, the BOJ needs to raise the policy interest rate in a timely and gradual manner.
On August 8, the Bank of Japan released the Summary of Opinions at the July 31 Monetary Policy Meeting. The main points are as follows:
Economic Developments
Japan's economy has recovered moderately, although some weakness has been seen in part. Structural issues of Japan's economy lie in subdued consumption due to the declining birthrate and aging population, and the industrial structure generating low profits. It is likely to keep growing at a pace above its potential growth rate, as a virtuous cycle from income to spending gradually intensifies.
Although private consumption has not been so strong, it is likely to remain resilient. Not only is this due to factors such as cuts in income tax and inhabitant tax, but it is also because the results of this year's annual spring labor-management wage negotiations are likely to be further reflected in wages.
Prices
Underlying inflation, measured by the Consumer Price Index (CPI), is expected to increase gradually. In the second half of the projection period, it is likely to be at a level that is generally consistent with the price stability target. The results of this year's annual spring labor-management wage negotiations have started to be reflected in the statistics. A virtuous cycle between wages and prices has likely begun to operate, and underlying inflation has shown steady progress toward 2%.
Upside risks to prices require attention since a rising number of industries have seen supply shortages and excess demand as a result of labor shortages. In addition, import prices have risen due to overseas inflation and the past depreciation of the yen.
Monetary Policy
Japan's economic activity and prices have been developing generally in line with the BOJ's outlook. The year-on-year rate of change in import prices has turned positive again, and upside risks to prices require attention. It should be noted that raising the rate at a moderate pace means an adjustment in the degree of monetary accommodation in accordance with underlying inflation, which will not have monetary tightening effects. Even if the BOJ raises the policy interest rate, the nominal interest rate will continue to be at a highly accommodative level of 0.25 percent, and there is no change in the Bank's stance to firmly support the economy.
Assuming that the price stability target will be achieved in the second half of fiscal 2025, the BOJ should raise the policy interest rate to the level of the neutral interest rate of 1% toward that time. After this meeting, if it is confirmed that prices will develop in line with the BOJ's outlook and that positive corporate behavior -- such as solid business fixed investment, sustained wage hikes, and a continued pass-through of cost increases to selling prices -- will be maintained, it will be necessary to proceed with further adjustment of the degree of monetary accommodation as appropriate.
Summary of Opinions at the Monetary Policy Meeting
