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Bank of Japan Changes Inflation Outlook

The Bank of Japan changed its inflation stance in its meeting on Tuesday for the first time since 2014. With energy costs spiking, the BoJ has decided to revise its inflation projection from 0.9% to 1.1% for the fiscal year starting in April. The bank also projects inflation to remain at 1.1% for the following year. This signals that, while Japan has largely been a hold-out when it comes to the inflation sweeping across various economies across the globe, prices are still rising, primarily in fuel and cooking essentials.

The Bank of Japan also used slightly different language in its meeting to describe its price risk assessment. Since 2014, the bank’s price risk assessment has been “skewed to the downside”, while the bank now said it was “generally balanced”.

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The yen is a popular asset during turbulent times.

However, Japanese companies have been absorbing these price increases for the most part, and Japan’s inflation is so far still weaker than that in other countries such as the United States or the UK. In fact, in its quarterly outlook report, the bank still projects inflation to remain well below 2% for the period ending in 2024.

Therefore, as of now, the bank is maintaining its monetary policy and making no change to asset purchases, negative interest rate and yield curve control policies. This comes even as other global central banks are tightening their monetary policies. For now, the pandemic-driven stimulus the Japanese government has been injecting into its economy will continue.

This revision by the BoJ was largely expected by the financial markets, though within an hour of the announcement, the Japanese yen fell against the US dollar to a near-5-year low at ?115.

Japan has seen a year-on-year increase in November and December 2021 in wholesale costs as high as 8%-9%, which indicate that input costs are increasing.

Consumer spending has been rising in Japan, primarily aided by the lifting of restrictions and states of emergency from major cities, including Tokyo. However, with the rapid spread of the Omicron variant, the Japanese government is likely to return to these measures, which will have an inevitable effect on consumer behavior.

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