In a live IMF/World Bank meeting panel, Bank of Japan Governor Haruhiko Kuroda reiterated his dovish stance that, though Japan’s inflation rate maybe around 2.0% for the time being, the BoJ should persistently continue with its current aggressive monetary easing in order to achieve its price target of 2.0% inflation in a sustainable manner, reported Reuters. 

Additional Takeaways:

The rise of inflation in services has been limited, indicating that inflation in Japan has not been as widespread as in the US. 

A rise in commodity prices leads to a net outflow of income from Japan’s economy. 

As Japan is a commodity importer, a rise in commodity prices pushes down on the economy through a decrease in households’ real income and corporate profits. 

Japan’s output gap is still negative and economic overheating has not been of concern. 

The BoJ’s monetary policy should be to provide accommodative financial conditions and support the achievement of a full-fledged economic recovery. 

Japan’s economy seems to be more resilient against the rise in commodity prices than it was in 2008. 

There is still ample room for pent-up demand to materialize as the impact of Covid-19 subsides. 

Japan’s inflation is expected to rise in the short run, but such a rise consists primarily of cost-push inflation and therefore lacks sustainability. 

In Japan, it is unlikely that the current rise in commodity prices due to supply factors will immediately lead to a sustained rise in wages and prices. 

The BoJ will continue to conduct policy under its existing framework of yield curve control. 

Even with a cost-push shock like the current one, the BoJ has not faced the trade-off between prioritizing economic stability or price stability, unlike other central banks.

The BoJ’s role in the current context is perfectly clear and it is to firmly support Japan’s economic recovery. 

The BoJ will carefully examine various risks, including Covid-19, and continue to conduct monetary policy appropriately under yield curve control. 

Market Reaction

The yen has come under some selling pressure in recent trade in wake of the latest dovish remarks from Kuroda. 

This article was originally published by Fxstreet.com.Read the original article here.

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