Bank of Japan, the Board's considerations

The members of the board of Bank of Japan (BoJ) they shared already at January the opinion according to which the probability of reaching the inflation target by 2% was sustainably gradually increasing. It is one of the most important points to emerge from the minutes of the meeting of January 22 and 23, which paved the way for the end of the ultra-accommodative policy, which was then decided by the Japanese central bank in the subsequent meeting last week.

During the two-day meeting in January, the BoJ maintained its ultra-loose monetary settings but signaled its growing belief that the conditions were being met to phase out its enormous monetary stimulus, which made it an absolute outlier among major global banks.

The crucial step

Council members “shared the recognition that the likelihood of realizing the prospect of a gradual increase in core consumer price index inflation towards achieving the price stability objective continues to increase gradually and that, in future, if the virtuous circle between wages and prices confirmed and if the achievement of the goal was in sightthe bank would likely decide whether to continue with its large-scale monetary easing measures, including negative interest rate policy,” the minutes read.

Council discussions

In this situation, some members expressed the view that, with the pass-through of the past increase in import prices to consumer prices, the upside risk that the inflation rate was significantly higher than 2% would have decreased. These members argued that there would be sufficient time to examine factors such as pay conditions.

One member stated that a delay in making this decision could create the risk of compromising the achievement of the 2% target and making a rapid monetary tightening.

One member expressed the view that if foreign central banks headed for interest rate cuts, the flexibility of monetary policy in Japan could be reduced. The member said that now it is about “a golden opportunity for a change in monetary policy, and that the Bank's policy decisions must take into account the fact that if the opportunity for policy review is missed and current monetary policy is continued, the associated side effects will remain until the next recovery phase, particularly that of the overseas economy”.

The comparison with the West

The minutes also reveal the discussions of Bank of Japan officials regarding the comparison with what is happening in the major Western economieswhere central banks have reached peak tightening and are poised to cut rates throughout the year.

Some members pointed out that “the state of Japan's economic activity and prices differed significantly from the conditions faced by the United States and Europe a few years ago, when interest rate increases began in those economies. These members continued that, therefore, in Japan there was no need to implement a rapid monetary tightening like that pursued in the United States and Europe”. One of these members added that “some market participants, especially foreign investors, had misinterpreted this point.”