NAGASAKI, Japan, Oct 3 (Askume) – Bank of Japan (BOJ) board member Asahi Noguchi said on Thursday the central bank should be patient in maintaining loose monetary policy as it will take time to overcome the public’s view that prices will not rise significantly.
The comments by Noguchi, a well-known policy expert at the Bank of Japan, came a day after Japan’s new prime minister said the economy was not ready for further interest rate hikes, a surprisingly candid remark that sent the yen lower.
With inflation exceeding the Bank of Japan’s 2% target for more than two consecutive years and nominal wages continuing to rise, Japanese companies are willing to pass on higher costs through price increases, Noguchi said.
But Noguchi said the drop in real consumption shows that after decades of deflation and stagnant wage growth, households still assume prices will not rise significantly.
“It will take a long time for this sentiment to subside and for the whole society to adopt a mindset in line with the Bank of Japan’s 2 percent inflation target,” Noguchi said in a speech to business leaders in the southern Japanese city of Nagasaki.
“Until then, the most important thing for the Bank of Japan is to patiently maintain an accommodative monetary environment,” he said.
Bank of Japan Governor Kazuo Ueda made the comments after meeting on Wednesday with Japan’s new Prime Minister Shigeru Ishiba, who later said Japan was not ready to raise interest rates further.
The dollar rose 0.3% against the yen on Thursday, hitting a one-month high of 146.84 yen, partly offset by overnight gains due to low expectations for a near-term interest rate hike by the Bank of Japan.
Most economists polled by Askume from Sept. 4-12 expected the Bank of Japan to raise interest rates again before the end of the year.
Japan’s economy grew at a 2.9% annual rate in the second quarter as steadily rising wages supported consumer spending. Capital spending also kept rising despite weak demand in China and slowing U.S. growth, which have clouded the outlook for the export-dependent country.
Rising wages are expected to boost consumption further as household incomes rise, Noguchi said. Continued wage growth will also likely become a bigger driver of inflation in the services sector as companies prepare to deal with rising labor costs, he said.
Noguchi said: “The Bank of Japan will gradually adjust its monetary support and carefully review whether inflation is stable at around 2% and accompanied by wage growth.”
The Bank of Japan ended negative interest rates in March and raised short-term borrowing costs to 0.25% in July as Japan made progress in keeping inflation at 2%.
When the Bank of Japan raised interest rates in July, Ueda was forced to walk back his comments that it would continue to raise borrowing costs after his hawkish tone sent markets into a tailspin.
Ueda said after the meeting with Ishiba on Wednesday that he told the prime minister that the BOJ would proceed cautiously when deciding whether to raise interest rates further.
