Japan’s Priorities To End Deflation

Japanese Prime Minister Fumio Kishida urged the central bank on Wednesday to consider government priorities, such as permanently lifting the economy from deflation, when making monetary policy decisions. This statement comes ahead of the Bank of Japan’s monetary policy meeting next week, widely expected to see no major changes to its accommodative monetary settings.

Kishida stated that the government is taking different steps to address long-standing corporate practices prioritizing cost reduction, aiming for a cycle where price increases are accompanied by sustainable wage hikes. Speaking at a press conference, Kishida addressed market expectations that the Bank of Japan might soon end its traditional monetary policies, saying, ‘The Bank of Japan should make specific decisions on monetary policy. However, I hope that the central bank takes into account the government’s policy goals.’ He also mentioned that the government and the Bank of Japan agree on the need to put Japan on a path of sustainable growth, with stable inflation reaching the central bank’s target of 2%.

With inflation exceeding its 2% target for over a year, the Bank of Japan has laid the groundwork for gradually unwinding extensive stimulus measures, such as easing its grip on bond yields. However, Bank of Japan Governor Kozo Oida emphasized the need to maintain a accommodative policy until inflation is driven more significantly by domestic demand and higher wages, rather than pressures from rising costs.

More than 80% of economists surveyed by Reuters in November expected the Bank of Japan to end its negative interest rate policy next year, with half of them predicting April as the most likely time. Some see a chance for a policy shift in January. In an effort to sustain growth, the Bank of Japan keeps short-term interest rates at -0.1% and sets a loose cap at 1% for 10-year government bond yields.

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