Highlights

Key points from the Bank of Japan's December meeting summary
--The second half of fiscal 2023 (October to March) key to confirming if realization of price stability has come into sight
--Need to have prospects for hitting 2% inflation target in a stable, sustainable manner before considering ending the negative rate policy or yield curve control
--Not behind the curve without a rate hike now; wouldn't be too late if the BoJ waited until labor talk developments next spring
--The more flexible yield curve control adopted in October is giving BoJ more time to assess if 2% inflation is being realized via a positive wage-price cycle
--The risk of having to tighten policy rapidly on excessive price rises small but such risk would be significant if it were to materialize


Bank of Japan board members argued that they should wait until next spring (from March to May) to confirm whether annual labor talks will lead to a substantial wage hike for the second fiscal year in a row before considering lifting the negative short-term interest rate target or ending the yield curve control framework, according to the summary of opinions expressed at the BoJ's Dec. 18-19 meeting released Wednesday.

Policymakers agreed that they must maintain their easing stance"patiently" to support economic activity and structural reform toward a sustainable wage increase and stable inflation around 2 percent.

Given that higher import costs have fed through to a virtuous cycle between wages and prices and the society is shifting toward wage hikes, one member said,"it is highly possible that the wage growth to be agreed in next year's wage negotiations will exceed that agreed this year."

"It seems that achievement of the price stability target is coming in sight, and the second half of fiscal 2023 is an important period for finally determining whether the target will be achieved," the member said.

"Sustainable and stable achievement of the price stability target is not yet envisaged with sufficient certainty at this point, and thus the Bank needs to patiently continue with monetary easing under yield curve control," one member argued, echoing repeated remarks by Governor Kazuo Ueda.

Another member agreed:"To achieve the 2 percent target through the virtuous cycle between wages and prices, the growth momentum in nominal wages needs to strengthen further. It is thus important for the Bank to support the momentum in wage hikes through continuation of monetary easing."

Not Behind the Curve

A third member also said the bank should not be in a hurry to change policy.

"Given that the wage growth rate has not caught up with the inflation rate to date, even if next spring's wage hikes are considerably higher than expected, the risk that this will cause underlying inflation to significantly exceed 2 percent is small," the member said."The Bank is currently not in a situation where it would fall behind the curve if it did not rush to raise policy interest rates. It would not be too late even if the Bank makes a decision after it sees developments in labor-management wage negotiations next spring."

Clearer signs of substantial wage hikes in fiscal 2024 staring in April may emerge from the results of annual wage talks between major firms and their trade unions that usually come out in mid-March. Policymakers may have to wait until later to confirm whether smaller firms, which employ about 70 percent of the workforce, can afford to follow the lead of large corporations.

"Increasing the flexibility in the conduct of yield curve control at the previous MPM (in October) has lowered the likelihood of distortions on the yield curve," one member said."Therefore, unless underlying inflation strengthens to an excessive degree, the Bank will have sufficient leeway to determine whether the 2 percent target will be achieved through a virtuous cycle between wages and prices."

Some Warn Against Missing Timing for Normalization

At the same time, some members warned against being complacent about upside risks to inflation.

"While the risk of prices becoming excessively higher than expected and the Bank needing to rapidly tighten monetary policy is small, the cost incurred if this risk materializes would be significant," one member said.

"With the likelihood of achieving the price stability target of 2 percent in a sustainable and stable manner rising further, the timing of normalization of monetary policy is getting closer," Another member observed."While it is undesirable to make hasty decisions, it is 'better to be rough and ready than slow
and elaborate,' as the saying goes."

"To avoid the risk of high prices damaging the underlying trend in consumption and undermining the achievement of the price stability target, the Bank should not miss an opportunity in normalizing monetary policy," the member said.

No Change in Policy, Guidance at December Meeting

At the December meeting, the nine-member board voted unanimously to maintain its basic monetary easing stance under the seven-year-old yield curve control framework backed by large asset purchases, keeping its long-term interest rate target officially"around zero percent," with an actual upper limit around 1 percent, and the target for the overnight rate at minus 0.1 percent, in a decade-long campaign to achieve stable 2 percent inflation. The board also retained its guidance that it will"patiently continue with monetary easing" in order to"achieve the price stability target of 2 percent in a sustainable and stable manner, accompanied by wage increases."

Governor Ueda told a post-meeting news conference last week that he believed the certainty of the board's outlook that the underlying inflation rate will increase gradually toward achieving the price stability through fiscal 2025"continues to rise gradually" but also said the board"still needs to closely monitor whether a virtuous cycle between wages and prices will intensify."

The board will watch corporate pricing behavior and various price indexes, particularly service costs, through both economic data and interviews with firms, Ueda said.

Asked if the BoJ should start raising rates by ending its negative short-term interest rate policy before the US Federal Reserve begins cutting rates to avoid a sharp appreciation of the yen, the governor replied,"I think it would be inappropriate to consider changing our policy in a hurry on expectations that the Fed is likely to move in three to six months, for example. I don't think that way."

On ways to communicate the bank's policy intentions toward raising interest rates, Ueda said the board will provide existing and any new information as to how it analyzes data but that it is unlikely to predict when it plans to change policy. Asked about expectations among some market participants about a rate hike in January, he said there is not much new economic data available before the Jan. 22-23 meeting.

Market Consensus Before Announcement

The Bank of Japan's summary of opinions expressed at its Dec. 18-19 meeting is expected to show board members continued arguing that they would need to see clearer signs of substantial wage hikes in fiscal 2024 staring in April arising from the results of annual wage talks between major firms and their trade unions that usually come out in mid-March. The summary will also show ongoing debate among board members over the costs and benefits of monetary easing.

At the December meeting, the nine-member board voted unanimously to maintain its basic monetary easing stance under the seven-year-old yield curve control framework backed by large asset purchases, keeping its long-term interest rate target officially"around zero percent," with an actual upper limit around 1 percent, and the target for the overnight rate at minus 0.1 percent, in a decade-long campaign to achieve stable 2 percent inflation. The board also retained its guidance that it will"patiently continue with monetary easing" in order to"achieve the price stability target of 2 percent in a sustainable and stable manner, accompanied by wage increases."

Governor Kazuo Ueda told a post-meeting news conference last week that he believed the certainty of the board's outlook that the underlying inflation rate will increase gradually toward achieving the price stability through fiscal 2025"continues to rise gradually" but also said the board"still needs to closely monitor whether a virtuous cycle between wages and prices will intensify."

The board will watch corporate pricing behavior and various price indexes, particularly service costs, through both economic data and interviews with firms, Ueda said.

Asked if the BoJ should start raising rates by ending its negative short-term interest rate policy before the US Federal Reserve begins cutting rates to avoid a sharp appreciation of the yen, the governor replied,"I think it would be inappropriate to consider changing our policy in a hurry on expectations that the Fed is likely to move in three to six months, for example. I don't think that way."

On ways to communicate the bank's policy intentions toward raising interest rates, Ueda said the board will provide existing and any new information as to how it analyzes data but that it is unlikely to predict when it plans to change policy. Asked about expectations among some market participants about a rate hike in January, he said there is not much new economic data available before the Jan. 22-23 meeting.

Definition

The Bank of Japan releases the Summary of Opinions expressed by its nine policy board members six business days after each Monetary Policy Meeting.

Description

The BoJ holds eight MPMs a year, in January, March, April, June, July, September, October and December. The BoJ began publishing the summary in 2016 to provide a brief look at what was discussed at the latest meeting as part of its efforts to increase the transparency of the conduct of monetary policy. The governor of the bank holds a news conference at 1530 JST (0630 GMT), a few hours after the release of the monetary policy statement, to discuss the board's policy decision and assessment of the economic and financial conditions. More details become available when the summary is published. Before 2016, market participants had to wait until the release of the minutes, which comes a month or two after the meeting because the board must approve the minutes at the following meeting before its release. The summary is edited by the governor and does not require the board's approval.
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