By Leika Kihara
TOKYO- The Bank of Japan is setting the stage for an era of steady interest rate hikes by claiming victory in its long battle with deflation, sources and analysts say, in a major review of past policy that nods to significant consumer behavior shifts.
The findings would highlight how the central bank is drawing a line under former governor Haruhiko Kuroda’s radical monetary stimulus, and creating a new narrative to herald a return to more conventional policy that targets short-term interest rates.
The BOJ has said the review, which is governor Kazuo Ueda’s flagship project that looks at the pros and cons of monetary easing steps taken in the past 25 years, won’t have any implication for future monetary policy.
But the outcome, yet to be published in full, will present a paradigm shift for the central bank’s ideas around inflation.
“The BOJ is using the idea of Japan’s changing social norm to back up its projection that inflation will durably hit 2 percent in coming years – a prerequisite for rate hikes,” said former BOJ official NobuyasuAtago, who is currently chief economist at Rakuten Securities Economic Research Institute.
Two sources familiar with BOJ’s thinking said the review will help the central bank make the case that Japan’s economy can swallow the impact of a steady increase in current near-zero interest rates.
“The key message is that Japan’s deflationary norm has changed,” one of the sources said. “It’s essentially saying that Japan is ready for higher rates.”
Under Kuroda’s “bazooka” stimulus deployed in 2013, the BOJ sought to shock the public out of a deflationary mindset with huge money printing and achieve its 2 percent inflation target in roughly two years.
What the experiment failed to achieve was ultimately accomplished by external factors like supply constraints caused by the pandemic and the war in Ukraine, which pushed up import costs and kept inflation above 2 percent for well over two years.
Now, the central bank is pointing to changes in the way households and companies behave to explain how, by the words of deputy governor Shinichi Uchida, “this time is different” in Japan’s prolonged battle with deflation.
Japan is on the cusp of eradicating a “deflationary norm,” or the perception held by households and firms that prices and wages won’t rise much, Uchida said in a speech on May 27, describing labor market changes as structural and irreversible.
