That the medium-term outlook for prices is below the BoJ’s 2% target and risks are skewed to the downside reflects the combination of an expected fading of the impact of previous import price increases, as well as an increase in the negative contribution of energy prices.
Given the limited direct impact of monetary policy on supply side factors, the lack of policy change at the BoJ meeting in April was unsurprising. Governor Ueda had implied this would be the likely outcome, noting that “you don’t want to tighten monetary policy knowing that cost-push inflation will cool the economy”.3 One of the main takeaways from the meeting was that it will require strong, demand-driven inflation for the BoJ to begin normalising its monetary policy stance.
Though it is likely to be a lengthy process, the conditions for policy normalisation under Governor Ueda are being established. In its monetary policy statement, the BoJ dropped its usual guidance on future interest rates remaining at current levels or being lowered if deemed appropriate. Most importantly, it also announced it would begin a 12-18 month broad-perspective review of its monetary policy over the last 25 years.4
The review will particularly focus on the past interactions between monetary policy and economic activity and prices. In its outlook for economic activity and prices, the BoJ alluded to the potential for upward inflation surprises stemming from stronger than expected wage growth.
It is already expected that wage growth in March will be stronger than in previous years in Japan. While data is only available until February, it shows that recent year-on-year nominal wage growth has been positive and real wage growth has been negative (see Chart 3). If wage growth in March and April is stronger than expected and real wage growth turns positive, household consumption could strengthen and lead to demand-driven inflation.
