TOKYO: Bank of Japan board member Toyoaki Nakamura said on Thursday it was premature to tighten monetary policy as recent increases in inflation were mostly driven by higher import costs rather than wage gains.
While many firms raised pay this year, there was uncertainty on whether smaller companies can earn enough profits to keep hiking wages next year and beyond, the former executive of electronics giant Hitachi Ltd said.
Tightening monetary policy before rising prices are accompanied by higher wages would hurt domestic demand and corporate profits, Nakamura said.
“Sustainable, stable achievement of our 2% inflation isn’t in sight yet. We therefore need more time before shifting to monetary tightening,” Nakamura said in a speech to business leaders in the city of Gifu in central Japan.
Overseas risks also cloud Japan’s economic outlook, Nakamura said, pointing to recent weak signs in China’s economy and the potential fallout from aggressive U.S. interest rate hikes.
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“Close scrutiny of (economic) conditions and cautious decision-making are required when modifying monetary policy,” he said, warning against shifting policy too hastily.
The remarks contrast with those of another board member Naoki Tamura, who said on Wednesday that Japan’s inflation was “clearly in sight” of the central bank’s target, suggesting there was no consensus within the nine-member board on how soon the BOJ can scale back its massive monetary stimulus.
Under its yield curve control (YCC) policy, the BOJ guides short-term interest rates at minus 0.1% and the 10-year government bond yield around 0% to reflate economic growth and sustainably achieve its 2% inflation target.
After its heavy-handed defence of the yield cap drew criticism for distorting market pricing and fuelling unwelcome yen falls, the BOJ last month took steps to allow long-term rates to rise more in line with higher inflation.
With inflation having exceeded its target for the 16th straight month in July, markets are focusing on clues from BOJ policymakers on how soon the central bank could take bolder steps toward phasing out its radical stimulus.
Governor Kazuo Ueda has said the BOJ must maintain ultra-low rates until there is more evidence that Japan’s inflation can sustainably hit 2% backed by solid consumption and wage growth.
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