Bank of Japan revises inflation projection for first time since 2014


The Bank of Japan has changed its view on inflation risk for the first time since 2014, lowering the yen as the nation, which has been battling deflation for decades, faces growing pressure from rising food and energy prices.

Despite a historic change of view, the BoJ did not change its monetary stance on Tuesday, deciding to keep the interest rate negative, buying property and yield curve control policies unchanged.

The BoJ has revised its inflation projection upwards from 0.9 percent to 1.1 percent for the fiscal year beginning in April. The central bank, which said the recovery of the Japanese economy had become “obvious”, also changed its assessment of price risk from “distorted to the bottom”, a term used since October 2014, to “generally balanced”.

Although the BoJ move was widely expected, speculation that the central bank could be under pressure to react more aggressively to rising prices rose ahead of this week’s meeting. Rising prices in Japan, although noticeable in a country accustomed to constant or falling prices, still remain lower than elsewhere in the world, especially in the US and Europe.

After the announcement of the BoJ, the yen fell against the US dollar, in one phase it falls below the limit of 115 ¥ and in the range close to the five-year minimum.

The BoJ left the minus 0.1 percent target for short-term interest rates unchanged and promised to target long-term rates around zero as inflation remained below the 2 percent target, even as other major central banks switched to tighten ultra-loose policies.

“We need to closely monitor whether the rise in prices will have a negative impact on the income environment and the mood of households before improving employment and wage increases,” Haruhiko Kuroda, the BoJ governor, said on Tuesday afternoon.

Asked if the softening of the yen could become a burden, Kuroda said that “for now, there is no change in our opinion that a weaker yen helps increase prices and therefore has a positive impact on the Japanese economy.”

Marcel Thieliant, a senior Japanese economist at Capital Economics, said in a note after the announcement: “We are even more pessimistic than the bank about the medium-term outlook for inflation.

“A tightening in these circumstances would be a complete mockery of the 2 percent inflation target, and we remain of the view that the bank will keep interest rates low for the foreseeable future.”

Since the previous outlook in October, import costs have risen due to high energy prices and weakened yen.

Year-on-year increases in wholesale prices in Japan in November and December remained at a high of 8 to 9 percent, reflecting an increase in entry costs. Companies that sell everything from food to household necessities have started passing on those costs to consumers.

Consumer spending has risen since Japan lifted a state of emergency in cities in October including Tokyo, but the coronavirus infections have also increased with the expansion of the Omicron variant.

The government should put prefectures, including the capital, in a quasi-state of emergency again, which could have a negative effect on consumer behavior.


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