Bank of Japan to Maintain Ultra-Loose Monetary Policy Amid Possible Deflation

Market analysts expect the Bank of Japan (BoJ) to adjust its price forecast set for release next week upwards, as the consumers start to feel the effect of higher raw material costs. However, the bank stressed its decision to keep its monetary policy ultra-loose as the nation’s inflation rate remains well below the 2% target.

The apex bank is also expected to highlight risks associated with the recent spine in Omicron coronavirus cases but could maintain the view that the Japanese economy is on track for steady recovery from last year’s COVID-19-induced slump.

Furthermore, the BoJ should announce the maintenance of its short-term interest rate target at -0.1% and its 10-year bond yields at 0% at its policy review scheduled for next Monday to Tuesday. That said, analysts at SMBC Nikko Securities wrote in a research note that: “The BOJ could upgrade its price forecast but will still project inflation to remain around 1.5% in fiscal 2023. That means a tweak to the BOJ’s rate policy is off the cards this year.”

Unlike the US, which is battling rising inflation rates, the BoJ remains focused on preventing a fall into deflation as poor household spending and wage growth restricts consumer inflation at zero. However, fresh pointers of changes in corporate price-setting practices have sparked debate among policymakers on the possibility of an inflation spike in 2022.

Meanwhile, corporate and household inflation projections have jumped to multi-year highs as a recent record spike in wholesale inflation prompted more firms to transfer the responsibility of rising costs to consumers.

Bank of Japan Survey Show Spike in Firm Retail Price Hike

A recent BoJ business survey, dubbed “tankan,” showed that there was an increase in the number of firms recording retail prices spike. According to the survey, consumers are charged more for goods, ranging from gasoline to flour and cooking oil.

However, Reuters recently reported that inside sources say that the apex bank is likely to increase its inflation forecast for 2022 starting in April, according to its quarterly report.

That said, BoJ governor Haruhiko Kuroda could assert that monetary conditions will remain ultra-loose in Japan, even as its US counterpart has announced that it would have at least three hikes this year.