Economy

Central Bank Economist by Reuters

By Leika Kihara

TOKYO – A former chief economist at the Bank of Japan has warned that the central bank may be underestimating the importance of promptly addressing rising inflation pressures stemming from increasing service prices and wages.

On Tuesday, the Bank of Japan revised its inflation forecasts, projecting rates well above its 2% target for this year and next. However, the bank attributed these adjustments mainly to temporary factors, such as more businesses passing increased raw material costs onto consumers in the form of higher goods prices.

The Bank of Japan anticipates that inflation will fall below 2% by 2025, as cost-push factors diminish and are expected to be replaced more significantly by upward pressures from wage increases.

Seisaku Kameda, who played a key role in developing the BOJ’s forecasts from 2020 to 2022, suggested that the central bank might be overlooking a consistent increase in service prices by concentrating too heavily on cost-driven inflation.

"Although cost-push inflation is currently the main factor driving price increases, we are witnessing a steady rise in service prices, and wages are likely to see significant growth next year," Kameda noted in an interview on Wednesday, shortly after the bank relaxed its 1% cap on long-term bond yields.

He emphasized that even if cost-push pressures begin to wane, the ongoing rise in service prices and wages could become broader and more persistent. "I believe the BOJ is not giving enough attention to these price pressures, which puts it at risk of falling behind the curve," he stated.

Kameda anticipates that the Bank of Japan will make additional moves to gradually exit its bond yield control policy and may end negative short-term interest rates as early as April.

"The sooner the BOJ normalizes its policy, the better, as Japan transitions from a deflation-ridden economy to one finally experiencing some inflation," added Kameda, who is also an economist at a think tank associated with Japan’s Sompo Holdings insurance group.

With inflation having surpassed the BOJ’s 2% target for more than a year, many analysts predict that the central bank will discontinue its bond yield control and negative rate policies next year.

BOJ Governor Kazuo Ueda has emphasized the necessity of maintaining an ultra-loose monetary policy until the current cost-driven inflation evolves into price increases fueled by strong domestic demand and wage growth.

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