In a global wave of monetary tightening, the Bank of Japan needs to maintain massive stimulus to support an economy facing a resurgence of COVID-19 infections and slowing global demand, one of its board members said. On Thursday, BOJ board member Toyoaki Nakamura said lingering supply constraints, rising commodity prices, and a renewed spike in pandemic cases clouded the outlook for Japan’s economy.
Nakamura said market nervousness over aggressive interest rate hikes by major central banks could also hurt global growth by pushing capital out of emerging economies. According to him, such risks, along with Japan’s negative output gap, justify maintaining ultra-loose monetary policy. “The Japanese economy is still struggling to recover from a pandemic-induced slump,” Nakamura said.
When demand remains short of supply, shifting to a tightening stance would harm the economy and restrict household and business activity, he said. Despite a flurry of interest rate hikes by central banks battling record prices, the BOJ is concentrating on supporting Japan’s delayed recovery from the pandemic. Due largely to slow wage growth, Japan’s consumer inflation is below the US and European average of over 8%, Nakamura said.
As raw material costs have risen, Japan must address the effects through targeted fiscal measures instead of tightening monetary policy. As a result of higher energy, food, and durable goods prices, core consumer inflation may accelerate toward year-end. However, such a boost is likely to dissipate afterward, said Nakamura. Keeping interest rates ultra-low is essential if Japan is to achieve our price target in a sustained, stable manner, he said.