TOKYO – Japan’s central bank has kept its ultra-loose monetary policy unchanged despite signs that growth was moderating even before a recent sales tax hike.
The Bank of Japan ended a policy meeting Wednesday by saying it will maintain its current pace of asset purchases. That was expected, since the BOJ needs time to monitor the impact of the 3 percentage point increase in the sales tax, to 8 per cent, that took effect April 1.
Prime Minister Shinzo Abe’s formula of strong government spending and lax monetary policy helped the world’s third-largest economy emerge from a long deflationary slump last year.
But pressure for more action is building, with even the International Monetary Fund urging the government to press ahead with long-promised reforms to sustain growth.
In a report issued Monday, the IMF said the effects of Abe’s program of inflationary stimulus appeared to be waning.
“A successful transition to self-sustained, deflation-free growth remains uncertain,” it said, warning that slower growth for Japan would hurt regional economies with close links such as South Korea, Thailand and Indonesia.
Abe has promised to introduce the specifics of his growth strategy by June.
“The next three to six months are absolutely critical. It’s time to deliver,” Gerald Curtis, a Japan expert at Columbia University, said after Abe told a recent conference organized by the Economist magazine that Japan was capable of “dramatic change.”
Abe has promised tax cuts and other measures to encourage more corporate investment, but has not yet spelled out the specifics of his reform program.
In a half-year outlook issued Wednesday, the BOJ said its monetary easing is working and will continue as long as necessary to ensure its “price stability target” of 2 per cent inflation.
But it acknowledged a wide range of uncertainties, including slower-than-expected growth in exports.
Data released Wednesday were lacklustre.
— 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 tax hike.
— 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.
— A survey of small and medium-size companies showed sentiment darkening in April to its worst level in over a year.
Abe has proposed a slew of potential reforms, including an easing of labour regulations to allow more unpaid overtime, an expansion of temporary hiring of foreign workers and an increase in job opportunities for women.
Japan’s participation in the 12-nation, U.S.-led Trans-Pacific Partnership trade talks is seen as one way to force changes in some industries such as agriculture and health services, dominated by politically powerful vested interests.
It is unclear just how quickly any such changes might materialize. Marathon negotiations with U.S. trade officials last week failed to yield a hoped-for “basic agreement” on slashing tariffs and other barriers for U.S. farm products.
Such concessions, though politically difficult, are part of a process of expanding access for Japanese manufacturers to faster-growing markets in the region as Japan’s own population ages and shrinks.
Japanese companies increasingly are stepping up production and acquisitions in overseas markets while skimping on investments in their home market, where wages have been stagnating for years.
Abe’s inflationary economic strategy will succeed only if consumer demand picks up as a result of higher wages, economists say.
“Incomes are not expanding fast enough to offset high inflation,” Marcel Thieliant of Capital Economics said in a commentary.
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.
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