TOKYO: The Bank of Japan (BoJ) must maintain ultra-loose monetary policy as recent cost-push inflation could hurt the economy, says governor Haruhiko Kuroda(pic), highlighting the widening gap with the US Federal Reserve’s (Fed) aggressive tightening plan.

       Kuroda said consumer inflation is expected to accelerate as some firms pass on rising energy and food costs to households.

       “Instead of leading to higher wages and corporate profits, such cost-push inflation will weigh on the economy in the long run by hurting corporate profits and households’ real income,” Kuroda told parliament.

       While nominal wages may increase “quite significantly,” the rise in consumer inflation may sap households’ purchasing power by pushing down price-adjusted real wages, he added.

       “Given recent price developments, we need to patiently maintain our powerful monetary easing,” Kuroda said.

       Kuroda’s remarks came in the wake of those by Fed chair Jerome Powell, who pledged on Monday to move “expeditiously” to raise rates to keep an upward price spiral from getting entrenched.

       The yen fell through the psychological 120 level against the dollar for the first time since 2016 yesterday, after Powell’s hawkish remarks raised bets on higher US rates and widened the policy gap between the Fed and a dovish BoJ.

       As part of efforts to fire up inflation to its elusive 2% target, the BoJ currently caps long-term borrowing costs around zero. While it has slowed purchases of government bonds and exchange-traded funds (ETF) in recent years, it continues to hold huge amounts of assets on its balance sheet.

       In the event the BoJ decides to reduce its ETF holdings, it will do so in a way that minimises the central bank’s losses and any disruption to financial markets, Kuroda said.

       But it was premature now to debate an exit from easy policy, including how the BoJ could reduce its ETF holdings, with inflation yet to sustainably hit 2%, he said.

       Last Friday, the BoJ maintained its massive stimulus and warned of heightening risks to a fragile economic recovery from the Ukraine crisis, reinforcing expectations it will remain an outlier in the global shift towards tighter monetary policy.

       Rising fuel and commodity prices blamed on the war in Ukraine could drive up consumer inflation to the BoJ’s 2% target in coming months, Kuroda had said.

       But such cost-push inflation will be short-lived and won’t prompt the BoJ to withdraw stimulus, he added, stressing the bank’s resolve to maintain huge monetary support for an economy yet to fully recover from the Covid-19 pandemic’s wounds.

       “There’s a chance Japan will see inflation move around 2% from April onward. But most of that is due to rising commodity prices, so there’s no reason to tighten monetary policy. Doing so would be inappropriate,” he told a news conference last week.

       The BoJ’s dovish tone is in stark contrast with the Fed and the Bank of England, which raised interest rates this week to stop fast-rising inflation becoming entrenched.

       As widely expected, the BoJ maintained its short-term rate target at minus 0.1% and that for the 10-year bond yield around 0% at the two-day policy meeting that ended last Friday.

       A resource-poor country that relies almost entirely on imports for fuel and gas, Japan is particularly vulnerable to the economic hit from global commodity inflation. — Reuters