The Strategist

Bank of Japan: Japanese companies are too cautious to increase prices

07/26/2017 - 14:42

Bank of Japan’s Deputy Chairman Hiroshi Nakaso said that the services sector has simplified operations to avoid the transfer of labor costs to consumers. However, there are indications that companies will raise prices in the future, Reuters reports.

Nakaso, in a speech to business leaders in Hiroshima, western Japan, also expressed confidence that inflation would reach the Bank of Japan target of 2% during the 2019 fiscal year, and said that the regulator should adhere to its quantitative easing program.

Consumer spending, export growth and the improvement in the production gap are a reason for a positive outlook, but many economists continue to argue that the Bank of Japan's inflation forecasts are overly optimistic.

According to Nakaso, the central bank should continue to buy exchange-traded funds (ETF) to reduce risk premiums, but the policy is subject to growing criticism for the artificial increase in stock prices.

Last week, the Bank of Japan supported the existing monetary policy, but again canceled the deadline for achieving its elusive goal of inflation, reinforcing the view that it lags far behind other major central banks in terms of reducing the large-scale incentive program.

"Companies are trying to absorb higher labor costs by reviewing their business processes," Nakaso said on Wednesday.

"The Bank of Japan does not expect that it will continue forever." The gap in production volume is clearly improving, so companies will become more aggressive in setting wages and prices. "

Nakaso added that he sees no need to further soften the policy, as consumer prices are still growing.

Nakaso cited several examples of corporate streamlining: some companies in retail and food services responded to labor shortages by cutting their working hours, instead of raising wages to attract new employees.

Some companies also invest in labor-saving technologies such as self-service, which allows companies to maintain their current level of service with fewer workers.

Despite the short-term negative impact on wages and prices, investment in labor saving technologies should be welcomed, as this increases productivity in the long run, Nakaso said.

The basic consumer prices of Japan in May grew by only 0.4% compared to the previous year.
Meanwhile, Sony Financial’s Chief Economist Masaaki Kanno is confident that the Bank of Japan cannot openly admit that the stated goals for achieving inflation are initially unrealistic, fearing a loss of confidence from investors.

The Chief Economist of Sony Financial noted that the Central Bank is not able to admit that the declared inflation targets cannot be achieved in the short term. At the same time, Masaaki Kanno said that the Bank of Japan is increasingly engaged in monetizing the state debt of the country and in the future the market of government bonds of Japan can simply cease to exist:

"Japan will not be able to reach the inflation rate of 2% in the next few years, which will take much longer, mainly because the inflationary dynamics will depend on the expected increase in salaries … Salaries in Japan will be increased, but it will be a very gradual process, it can take a long time."


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