Highlights
Bank of Japan board members argued that the bank should maintain its easing stance to ensure stable 2 percent inflation would be achieved with substantial wage hikes, even though it is necessary to expand the trading range of the long-term bond yield to recover some of the lost bond market functioning, according to the minute of the bank's Dec. 19-20 meeting released Monday.
The minutes also showed some board members said the adjustment in the trading range should not be regarded as a rate hike. They stressed that maintaining the easing stance is necessary to help firms raise wages and lead the economy on to a sustainable growth path under stable 2 percent inflation.
"Signs of a virtuous cycle have started to be seen, as evidenced by the overall high levels of corporate profits and moves to increase wages amid tight labor market conditions," one board member said."However, the price stability target is not considered to have been achieved, and therefore it is appropriate for the bank to maintain monetary easing with respect to the conduct of monetary policy for the time being."
A few members noted that Japan's economy is at a crucial juncture as to whether it can achieve a"virtuous cycle" in which higher incomes will lead to demand-based higher prices as opposed to the current cost-push inflation, which has been boosted by global supply constraints and heightened geopolitical risks.
It is therefore appropriate for the bank to continue with monetary easing and thereby firmly support the economy and realize a favorable environment for firms to raise wages, they said.
Members also discussed bond market functions that have been constrained by the BoJ's policy to artificially keep the interest rates at very low levels, which the bank believes should raise the economy's growth potential and change people's deflationary mindset.
The functioning of bond markets has deteriorated, and if this situation persists, members agreed, it could have a negative impact on financial conditions such as issuance conditions for corporate bonds and hamper the transmission of monetary easing effects.
"Some members pointed out that it was necessary for the bank to clearly explain that the expansion of the range of 10-year JGB yield fluctuations was a policy measure to make the current monetary easing more sustainable amid heightened global inflationary pressure, and that the expansion was not a policy change toward an exit from monetary easing," the minutes said.
At its December meeting, the BoJ's policy board decided unanimously to allow the yield on the 10-year Japanese government bonds to rise to 0.5 percent from the current cap of 0.25 percent amid upward pressures arising from aggressive tightening by other major central banks, hoping to revive some of the paralyzed market functions under its yield curve control regime.
At the same time, the board voted unanimously to maintain its basic monetary easing stance, keeping its zero to slightly negative interest rate targets along the yield curve and large asset purchases in order to support economic recovery from the pandemic-triggered slump and anchor inflation around its 2 percent price stability target.
The bank largely maintained its projection that rising upward pressures on the core CPI (excluding fresh food), led by prices for energy, food and durable goods, are"expected to decelerate toward the middle of fiscal 2023 (starting in April) because the contribution of such price rises to the CPI is likely to wane," justifying its decision to leave its highly accommodative policy stance unchanged.
"Thereafter, it is projected to accelerate again moderately on the back of improvement in the output gap and rises in medium- to long-term inflation expectations and in wage growth," it said in its policy statement issued on Dec. 20
Looking ahead, members referred to an eventual exit from the bank's highly accommodative policy stance that has been in place for nearly a decade but the summary provided no specifics, according to the minutes.
One member said that in the phase of an exit from the current monetary policy,"it will be necessary to examine where the risks associated with a rise in interest rates lie and whether market participants are well prepared."
"Although it is appropriate to continue with monetary easing at this point, it is necessary to examine this at some point in future and assess the balance between positive effects and side effects," another one said.
There was also an opinion that it would be premature to review the current 2 percent inflation target and the easing framework that that bank has maintained for the purpose of allowing inflation to overshoot and anchoring it around 2 percent.
"There has been an argument that the price stability target of 2 percent needs to be reviewed and examined, including the validity of the numerical target value," a member said."However, revision of that value is not appropriate since it could make the target ambiguous and the monetary policy response insufficient."
"In response to this, a different member said that there might be room for discussion on how rigidly the bank should adhere to the numerical value indicated by the rate of increase in the CPI," the minutes said.
Another member pointed out that it was appropriate to adopt the CPI as a measure for the central bank's price target, as was the case for other central banks.
The minutes also showed some board members said the adjustment in the trading range should not be regarded as a rate hike. They stressed that maintaining the easing stance is necessary to help firms raise wages and lead the economy on to a sustainable growth path under stable 2 percent inflation.
"Signs of a virtuous cycle have started to be seen, as evidenced by the overall high levels of corporate profits and moves to increase wages amid tight labor market conditions," one board member said."However, the price stability target is not considered to have been achieved, and therefore it is appropriate for the bank to maintain monetary easing with respect to the conduct of monetary policy for the time being."
A few members noted that Japan's economy is at a crucial juncture as to whether it can achieve a"virtuous cycle" in which higher incomes will lead to demand-based higher prices as opposed to the current cost-push inflation, which has been boosted by global supply constraints and heightened geopolitical risks.
It is therefore appropriate for the bank to continue with monetary easing and thereby firmly support the economy and realize a favorable environment for firms to raise wages, they said.
Members also discussed bond market functions that have been constrained by the BoJ's policy to artificially keep the interest rates at very low levels, which the bank believes should raise the economy's growth potential and change people's deflationary mindset.
The functioning of bond markets has deteriorated, and if this situation persists, members agreed, it could have a negative impact on financial conditions such as issuance conditions for corporate bonds and hamper the transmission of monetary easing effects.
"Some members pointed out that it was necessary for the bank to clearly explain that the expansion of the range of 10-year JGB yield fluctuations was a policy measure to make the current monetary easing more sustainable amid heightened global inflationary pressure, and that the expansion was not a policy change toward an exit from monetary easing," the minutes said.
At its December meeting, the BoJ's policy board decided unanimously to allow the yield on the 10-year Japanese government bonds to rise to 0.5 percent from the current cap of 0.25 percent amid upward pressures arising from aggressive tightening by other major central banks, hoping to revive some of the paralyzed market functions under its yield curve control regime.
At the same time, the board voted unanimously to maintain its basic monetary easing stance, keeping its zero to slightly negative interest rate targets along the yield curve and large asset purchases in order to support economic recovery from the pandemic-triggered slump and anchor inflation around its 2 percent price stability target.
The bank largely maintained its projection that rising upward pressures on the core CPI (excluding fresh food), led by prices for energy, food and durable goods, are"expected to decelerate toward the middle of fiscal 2023 (starting in April) because the contribution of such price rises to the CPI is likely to wane," justifying its decision to leave its highly accommodative policy stance unchanged.
"Thereafter, it is projected to accelerate again moderately on the back of improvement in the output gap and rises in medium- to long-term inflation expectations and in wage growth," it said in its policy statement issued on Dec. 20
Looking ahead, members referred to an eventual exit from the bank's highly accommodative policy stance that has been in place for nearly a decade but the summary provided no specifics, according to the minutes.
One member said that in the phase of an exit from the current monetary policy,"it will be necessary to examine where the risks associated with a rise in interest rates lie and whether market participants are well prepared."
"Although it is appropriate to continue with monetary easing at this point, it is necessary to examine this at some point in future and assess the balance between positive effects and side effects," another one said.
There was also an opinion that it would be premature to review the current 2 percent inflation target and the easing framework that that bank has maintained for the purpose of allowing inflation to overshoot and anchoring it around 2 percent.
"There has been an argument that the price stability target of 2 percent needs to be reviewed and examined, including the validity of the numerical target value," a member said."However, revision of that value is not appropriate since it could make the target ambiguous and the monetary policy response insufficient."
"In response to this, a different member said that there might be room for discussion on how rigidly the bank should adhere to the numerical value indicated by the rate of increase in the CPI," the minutes said.
Another member pointed out that it was appropriate to adopt the CPI as a measure for the central bank's price target, as was the case for other central banks.
Definition
The Bank of Japan publishes minutes following its monetary policy board meetings with a four or five week lag. The minutes expand upon the BoJ's post-meeting announcement.
Description
Investors who want a more detailed description of Bank of Japan opinions will generally read the minutes closely. The MPB may issue a statement after its monthly meeting but the minutes will be much more detailed. In particular they will reveal who voted for and against the Committee's decisions and provide a more detailed description of the MPB's thinking. As such, the minutes are a market mover as analysts parse each word looking for clues to future policy.
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