Haruhiko Kuroda, governor of the Bank of Japan, dismissed the possibility of a near-term shift away from ultra-loose monetary policy on Monday but expressed optimism that growing labor shortages will encourage businesses to raise wages.

The BOJ’s decision to widen the allowance band around its yield target last week, according to Kuroda, was made to maximize the impact of its ultra-easy policy rather than as the first step toward ending its significant stimulus program.

“This is definitely not a step toward an exit. The Bank will aim to achieve the price target in a sustainable and stable manner, accompanied by wage increases, by continuing with monetary easing under yield curve control,” Kuroda said in a speech delivered to a meeting of business lobby Keidanren.

Additionally, he predicted that as the effects of skyrocketing import costs fade, Japan’s average consumer inflation will likely slow in the upcoming fiscal year below the BOJ’s 2% target.

However, according to Kuroda, wage growth will likely happen gradually because of the growing labor shortages in Japan and the structural changes in the country’s labor market that are resulting in higher wages for temporary workers and an increase in the number of permanent employees.

“Labor market conditions in Japan are projected to tighten further, and firms’ price- and wage-setting behavior is also likely to change,” Kuroda said.

“In this sense, Japan is approaching a critical juncture in breaking out of a prolonged period of low inflation and low growth,” he said.

The BOJ’s yield curve control targets, which are set at -0.1% for short-term interest rates and around 0% for the yield on 10-year bonds, are seen as crucial to how quickly the BOJ could raise them.

Last week, the BOJ surprised the markets by unexpectedly widening the band around its target 10-year yield. Kuroda had said that rather than serving as a stepping stone to a full-fledged policy normalization, the action, which permits long-term rates to rise further, was intended to ease some of the costs of prolonged stimulus.

However, markets are awash in rumors that the BOJ will increase the yield targets when the term of the dovish governor Kuroda expires in April of the following year, despite inflation exceeding its 2% target.

While more businesses are beginning to raise prices to pass on rising costs to consumers, Kuroda said the BOJ must assess whether such changes in corporate price-setting behavior will become the new standard in Japan.

He added that the outcome of the spring wage negotiations between large corporations and unions will be crucial to the outlook for wage growth.

In his remarks at the same gathering, Prime Minister Fumio Kishida pleaded with business executives to assist in achieving wage growth that is sufficient to offset households’ rising cost of living.

As businesses continued to pass on rising costs to consumers, a sign that price increases were spreading, Japan’s core consumer inflation increased to 3.7%, a level not seen in the country for four decades.

For permanent employees, however, wages have hardly increased as employers have been wary of raising fixed costs in the face of a bleak economic outlook.

(Adapted from Reuters.com)

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