Monetary Policy at a Turning Point, Effects of a Weaker Yen on Prices

◆The Bank of Japan (BOJ) has adopted a price stability target but this does not necessarily mean that it has changed its framework for monetary policy. Even so, the release of a joint statement with the government and the disappearance of “1% for the time being” as the goal for inflation do signal a turning point.

◆Since the real economy and finance are two sides of the same coin, if the government foists the responsibility for deflation on monetary policy, there is no reason to think that expected inflation will steadily increase. The question is not establishment of an inflation target itself but what steps the government and the BOJ will take to achieve the target.

◆Viewing from the perspective of unit labor cost to overcoming deflation, it will be important to strengthen the profit foundations of companies in the context of monetary easing and to build a safety net that smoothly promotes the rehabilitation of companies and the reemployment of workers.

◆The yen depreciating 10% against the dollar would improve real GDP by around 0.2-0.4 percentage points from the second year. In light of past experience, yen depreciation over a year would have a limited impact on prices. However, if it extends over the long term, the resulting story would be different. Since inflationary pressure will accumulate through expansion of the economy, prices can be expected to trend gradually upward.

◆If the yen depreciates over the long term, it would take considerable time before prices begin to rise. If the yen changes course sharply to appreciation, economic volatility would increase and the achievement of an inflation target would likely be delayed. What is needed for the sustained rise of prices is sustainable economic growth. This is why yen depreciation should be viewed as an opportunity for engaging in regulatory/institutional reform and for strengthening the economic structure. In other words, what should be emphasized is medium- to long-term growth capacity rather than the short-term growth rate.