A few weeks ago, today’s interest rate decision by the Bank of Japan (BOJ) was a non-issue to many traders. This changed a week ago when rumors emerged that the bank would change its language and signal when an interest rate would come. In today’s monetary policy statement, the bank did not offer this guidance which led to a sharp decline on the Japanese Yen as shown below.
As expected, the bank left interest rates at record lows. The biggest news from today’s statement was that the bank would make it’s policy framework more flexible for the long-term yield target. It maintained its target for the 10-year government bond yield at almost zero percent. Below were the other key comments from the statement.
First, the bank highlighted the challenge of wage growth in the country. While the labour market has tightened in the past months, the wage growth has been sluggish. The bank attributed this to the nature of Japanese labour market structure. In this structure, wages are set differently between the regular and non-regular employees. Regular employees prefer the long-term stability of a job instead of wage increases. Firms on the other hand are cautious to offer more wages to employees because of the outlook of the global economy. The current labour shortage in the country has led to increased participation rate especially among the women and seniors.
Second, on the economic growth, the bank expects the economy to continue to grow at a pace above its potential this year. This will be against the backdrop of increased accommodative financial conditions and the increased government spending. From 2019 to 2020, the economy will continue on the current expansion trend which will be supported by external demand. The growth will decelerate because of the cyclical slowdown in business fixed investments. The scheduled consumption rate hike will also impact the economy.
Third, the bank officials talked about the Philips Curve. This is an economic concept which implies that inflation tends to rise as the labour market tightens. Recent data has shown the rate of inflation rising at a 1.2 rate, which is lower than the BOJ’s target of 2.0%. This is despite the improvement in the economy and the stimulus being offered by the BOJ. Still, the officials expect firms to start raising wages and prices of products, which may have a positive impact on the inflation rate.
