Japan’s central bank stands pat on monetary policy as industrial output, wages falter

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TOKYO – Japan’s central bank kept its ultra-loose monetary policy unchanged in a policy meeting Wednesday, despite data suggesting the economic recovery is weaker than expected.

The Bank of Japan is still monitoring the impact of an April 1 tax hike that is expected to sap growth as consumers adjust to higher costs.

But pressure for more action is building with signs the recovery is less robust than anticipated ahead of the tax hike.

Prime Minister Shinzo Abe’s formula of strong government spending and lax monetary policy has helped the economy emerge from a long deflationary slump, but further measures are needed to sustain growth in coming years, economists say.

Abe has promised tax cuts and other measures to encourage more corporate investment, but has not yet pushed through major reforms promised as part of his “growth strategy.”

The government said industrial output rose 0.3 per cent in March from the month before, better than the 2.3 per cent decline in February but still meagre given the jump in retail sales before the 3 percentage point increase in the national sales tax, to 8 per cent.

Base wages fell 0.4 per cent from a year earlier, though bigger bonus payments pushed cash earnings up 0.7 per cent in March from a year earlier.

Last year, the central bank and government set a shared target of achieving 2 per cent inflation within about two years. A weakening of the Japanese yen beginning in late 2012 helped boost prices for imported energy and other goods, aiding that effort, and Japan’s core inflation rate, excluding fresh food, was 1.3 per cent in March. Excluding energy costs it was 0.7 per cent.

But higher prices are a burden for consumers whose wages have stagnated or fallen for years.

“Incomes are not expanding fast enough to offset high inflation,” said Marcel Thieliant of Capital Economics. “While incomes may get some support from the spring wage negotiations, the effect is unlikely to be large.”

Japan’s largest trade union federation, Rengo, has negotiated an average base wage increase of almost 2,000 yen ($20) a month, the biggest increase in years. But the group represents only one-in-10 workers.

“The upshot is that if consumers want to maintain their current living standards they will need to continue running down their savings,” Thieliant said in a commentary.

Japan’s industrial output rose nearly 3 per cent in the first three months of the year, and employment conditions have improved, the latest figures show. But increasing purchasing power is key to spurring enough demand to encourage companies to increase investment at a time when the population is both shrinking and aging.

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