Bank of Japan board member Sayuri Shirai said Thursday that the BOJ can anchor inflation around 2% without causing too much stress on households and businesses but repeated her projection that stable 2% CPI won’t be achieved around fiscal 2015 as the majority of the board predicts.
She also told business leaders here that consumer prices will rise gradually because while households’ long-term inflation expectations have continued to level off since late 2011, the rise in longer-term expectations for growth and income – together with an alleviation of future concerns over fiscal conditions and the social security system – may gradually lead to a situation where mild inflation is more readily acceptable.
“I consider that the 2% inflation is likely to be reached toward the end of the projection period at a moderate pace that does not impose excessive burdens on firms and households,” Shirai said, referring to the BOJ’s latest three-year forecast period through March 31, 2017.
“I consider that such a gradual path is likely to lead to a society where the 2% is maintained in a stable manner and is desirable for Japan’s economy.”
The rate of wage increases will be roughly equivalent to the sum of the rate of the aggregate price increases and the rate of labor productivity growth, she said.
“It is expected that the rate of productivity growth will improve toward around 1% or somewhat higher over the projection period. Accordingly, the rate of wage increases will exceed the rate of price increases (excluding the temporary effects of the consumption tax hikes) by this magnitude.”
Shirai said her own assessment is that “the downside risks remain somewhat greater than the upside ones,” although the degree of downside risks has lessened to some extent compared to October 2013 and January 2014.
The path toward achieving the 2% target seems broadly on track so far, but there is uncertainty with regard to “the timing for achieving 2%” and thereafter for “the timing to gradually shift to a growth path that sustains 2% in a stable manner,” she said.
“In particular, I suggest that clear judgment on the timing to achieve 2% in a stable manner can be made only after examining the effects of the second round of the consumption tax hike,” she said. The government plans to raise the sales tax rate further to 10% in October 2015. In April, the tax was raised to 8% from 5%.
Shirai said her projection is based on the assumption that the BOJ will continue its aggressive easing beyond fiscal 2015 under the current policy framework.
“What is important is that the bank is conducting monetary easing with the aim of achieving 2% inflation in a stable manner with sustainable economic growth, rather than merely achieving 2% in a specific year and failing to meet the target in subsequent years,” she said.
At the BOJ policy meeting on April 30, when the bank released its semi-annual Outlook Report, three of the BOJ’s nine board members disagreed with the collective view of the policymaking panel that domestic inflation will reach 2% around fiscal 2015 from just over 1% now.
Urging caution on job creation and wage growth prospects, Shirai projected at the meeting that stable 2% inflation would not be achieved until close to the end of the bank’s new three-year projection period through March 31, 2017.
At the latest BOJ policy meeting on May 20-21, Shirai didn’t disagree with the board’s collective analysis of downside risks amid growing optimism about job and income prospects.
From January to April, Shirai didn’t endorse the analysis, urging that the pace of improvement in employment and income in Japan should be added to the list of risks.
After the policy meeting last week, BOJ Governor Haruhiko Kuroda sounded optimistic about domestic and overseas growth prospects but repeated his recent warning that Japan must fix supply constraints to ensure sustained growth.
Domestic demand is solid despite the April 1 sales tax hike although Japan’s April-June GDP is likely to contract after the strong Q1 growth reported last week, he told reporters. The pullback in retail sales is easing and the dip in demand for durable goods after rush purchases through March has been within expectations, he explained.