Japanese central bank renews strong mitigation pledge in response to Hawkish Fed signal

Haruhiko Kuroda emphasized on Tuesday that the gap with the Fed’s aggressive tightening plans is widening, as Tokyo — recent cost-push inflation could hurt the economy. The Bank of Japan must maintain ultra-loose monetary policy.

The central bank’s increasingly isolated dovish stance helped push the yen below $ 120 on Tuesday for the first time since 2016, and was warned by the Finance Minister against sharp exchange rate movements.

Kuroda said consumer inflation is expected to accelerate as some companies pass on rising energy and food costs to households.

“Rather than leading to higher wages and corporate profits, such cost-push inflation will put pressure on the economy in the long run by damaging corporate profits and real household income,” Kuroda said in parliament. Said.

Nominal wages can rise “quite significantly,” he added, but rising consumer inflation could reduce household purchasing power by pushing down price-adjusted real wages.

“Given the recent price trends, we need to be patient with strong monetary easing,” Kuroda said.

Kuroda’s remarks came after US Federal Reserve Chairman Jerome Powell promised to act “quickly” to raise interest rates so that the spiral of price increases wouldn’t take hold. I was.

The depreciation of the yen has become a politically sensitive topic for Japan as it pushes up already rising energy and raw material import costs and hurts the new economy from the coronavirus pandemic scars.

Finance Minister Shunichi Suzuki warned that the depreciation of the yen would boost the profits of exporters while burdening importers and households.

“The depreciation of the yen has both positive and negative effects on the economy,” Suzuki told reporters.

“We don’t want currencies to fluctuate sharply … the government is watching carefully how currency movements affect the economy,” he added.

As part of its efforts to accelerate inflation to the elusive 2% target, the Bank of Japan limits long-term borrowing costs to near zero. Although the purchase of government bonds and exchange-traded funds (ETFs) has been delayed in recent years, they continue to hold huge assets on their balance sheets.

Kuroda said that if the Bank of Japan decides to reduce its holdings of ETFs, it will do so in a way that minimizes central bank losses and financial market turmoil.

But it’s too early to discuss a break from simple policies, such as how the Bank of Japan can reduce ETF holdings, and inflation hasn’t reached 2% persistently, he said. Stated.

Reika Kihara, Tetsushi Kajimoto