BOJ board members skeptical about sustained rise in inflation

© Kyodo News

Bank of Japan board members expected inflation in Japan will accelerate toward the bank's 2 percent target due to higher energy prices but raised doubt about the sustainability of that upward momentum, a summary of opinions at a March policy meeting showed Tuesday.

Some members warned of downside risks to prices and the broader economy from recent commodity inflation at the March 17-18 meeting, where the Policy Board decided to maintain its ultraloose monetary policy amid uncertainty stemming from the crisis in Ukraine.

The BOJ is the only major central bank to not yet normalize policy, diverging from the U.S. Federal Reserve, which went ahead with its first rate hike since 2018, and the European Central Bank.

Japan's core consumer price index was up 0.6 percent in February from a year earlier and economists expect the figure to rise further as Russia's invasion of Ukraine has sent crude oil and commodity prices sharply higher amid supply concerns.

"The year-on-year rate of change in the CPI is likely to be at around 2 percent in the first half of fiscal 2022, due mainly to a surge in commodity prices. From the second half, however, attention needs to be paid to downside risks brought about by possible declines in commodity prices," one member said.

Another said, "Given the household budget constraints and competitive environment for firms, it is unlikely that a surge in prices of imported raw materials will lead to a sustained rise in the overall CPI."

BOJ Governor Haruhiko Kuroda has said price rises should be paired with wage growth to deliver strong domestic demand.

The yen has been weakening sharply against the U.S. dollar as currency markets price in the prospect of a widening interest rate gap between Japan and the United States. The dollar on Monday briefly rose above the 125 yen line for the first time since August 2015.

A weak yen inflates the costs of imported energy, food and other items.

One of the members on the Policy Board said the impacts of movements in commodity prices and exchange rates on the economy and prices, rather than the movements themselves, are an important factor guiding monetary policy.

"With the rises in commodity and other prices, the inflation rate may exceed 2 percent. However, if downward pressure on economic activity and prices increases, the economy may instead be in danger of falling into deflation again," one member said.

The summary of opinions was compiled by Kuroda and does not attribute comments to individual members.