BOJ policymaker sees signs of change in Japan’s deflationary mindset

By Leika Kihara

TOKYO (Reuters) -Japan is seeing early signs of change in the public’s long-held perception that wages and inflation won’t rise much, central bank policymaker Hajime Takata said, suggesting conditions for phasing out the bank’s massive stimulus are falling into place.

Takata stressed the need to maintain ultra-loose monetary policy for the time being, as slowing global growth heightens uncertainty on whether Japan can sustainably achieve the Bank of Japan’s (BOJ) 2% inflation target.

But he also said there were signs of change in corporate price and wage-setting behaviour that is pushing up not just goods but service prices, pointing to broadening inflationary pressure in the world’s third-largest economy.

While recent inflation is driven mostly by higher import costs, the increase in prices prodded many companies to hike pay to compensate employees for rising living costs, he said, adding that such wage increases could continue into next year.

“Personally, I believe Japan’s economy is finally seeing early signs of achieving the BOJ’s 2% inflation target,” Takata said in a speech.

“We need to patiently maintain the current massive monetary stimulus. At the same time, we need to respond nimbly against uncertainties as we’re seeing early signs of a positive cycle emerge” between wages and inflation, he said.

The remarks follow those of two other BOJ board members, who gave diverging views on how soon the central bank should consider scaling back its radical stimulus.

With inflation exceeding the BOJ’s 2% target for more than a year, markets are simmering with speculation the central bank will soon dismantle the radical stimulus programme of former Governor Haruhiko Kuroda.

Japan’s core inflation hit 3.1% in July, exceeding the BOJ’s 2% target for the 16th straight month. Firms also promised wage hikes unseen in three decades this year, heightening the case for a retreat from decades of ultra-loose monetary policy.

BOJ officials have said the central bank must keep interest rates ultra-low until robust domestic demand and sustained wage growth replace rising import costs as key drivers of inflation.

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