By Noriyuki Suzuki,
Outgoing Bank of Japan Governor Haruhiko Kuroda has learned the hard way that even a decade of unprecedented monetary easing is not enough to attain a 2 percent inflation target that he once thought would be achievable in two years.
His departure as the longest-serving BOJ chief comes at a time when, in the eyes of Kuroda, Japan may be starting to see conditions gradually falling into place for the price hike goal to be achieved in its true sense, accompanied by wage growth.
The outcome of closely watched "shunto" annual wage negotiations between labor unions and management is set to be the best in decades. Tepid wage growth, a major reason why the central bank is not convinced about the price outlook, may be changing as labor market conditions seem to be tightening.
While the side effects of monetary easing have been increasingly felt by some sectors of the economy, its positives include over 4 million jobs created as more women and elderly people entered the workforce, the return of base-pay hikes, and Japan's emergence from a state of deflation, Kuroda has said.
"It's a fact that there is upward pressure on wages when the possibility of a (sharp) increase in labor supply is low and the economy continues to recover," Kuroda said in late March. "We are still not there yet, but we are closer to attaining the 2 percent price stability target in a stable and sustainable way supported by wage growth."
As his tenure officially ends on Saturday, Japan's potential growth rate is around zero percent and its gap from the economy's actual output indicates demand was weaker than supply.
This bodes ill for the central bank when it envisions a transition from the current bout of inflation driven by surging costs rather than strong demand, reinforcing the view that monetary easing will be in place for a while as academic Kazuo Ueda takes over from Kuroda.
"The utmost priority for Mr. Kuroda was to achieve a departure from deflation so he pledged to do all the BOJ can to fire up inflation. We can say the monetary easing under him served as a detonator," said Shinichiro Kobayashi, a senior economist at Mitsubishi UFJ Research and Consulting.
"Deflation fears have already eased, but it became clear that the 2 percent target was still far off. Since it's a stated goal, the BOJ cannot take it back, and monetary easing has dragged on. He certainly raised public expectations, but the impact (of monetary easing) on the real economy was rather muted," Kobayashi added.
Kuroda, a former top currency diplomat of the Japanese government and president of the Asian Development Bank, became governor in 2013 and led the BOJ into uncharted territory with aggressive buying of government bonds and other assets to support the economy.
The BOJ now has a yield curve control program under which short-term interest rates are at minus 0.1 percent and 10-year Japanese government bond yields are guided near zero percent.
His time at the central bank coincided with Japan's second-longest postwar economic expansion. Powerful monetary easing that was a key pillar of the "Abenomics" economy-boosting program under then Prime Minister Shinzo Abe weakened the yen and boosted stocks.
Corporate earnings swelled, supporting their investment. Japan's total workforce expanded in the early years of Kuroda's term, though the pace of increase has slowed.
The percentage of women aged between 15 and 64 in the workforce stood at 64.3 percent in 2012 and climbed to 74.3 percent in 2022, government data showed. As of 2021, female labor participation was already higher than that in the United States and France but slightly lower than in Germany and Britain.
Japan has seen an increase in the number of nonregular workers amid tighter labor market conditions, but pay hikes for them have lagged.
"The problem is that companies made record profits and invested more overseas because they saw growth potential there and this did not translate into higher pay for employees," said Takuya Hoshino, a senior economist at the Dai-ichi Life Research Institute.
"That said, more people are job-hopping in search of better pay, and rigid working styles are changing, which is a good development. Japan is at a crossroads in terms of whether consumers can withstand rising prices even without help from forced savings accumulated during the COVID-19 pandemic," he added.
Japan's consumer inflation has remained above the BOJ's 2 percent target for nearly a year partly because the yen's sharp drop, a byproduct of the BOJ's dovish stance, has inflated import costs.
As the year-on-year effect of higher energy and raw material costs dissipates and government subsidies to reduce household utility bills remain, the key gauge of inflation is projected to undershoot the target later this year.
Kuroda has blamed deep-rooted perceptions among Japanese people that prices and wages will not rise for the BOJ's failure to achieve the inflation target. He sees this may be finally changing, though it is now his successor Ueda's turn to confirm that is the case.
"A key factor is whether smaller firms can follow big firms in raising pay for their employees and consumption will remain resilient despite price hikes," said Mari Iwashita, chief market economist at Daiwa Securities.
"A weaker yen and higher share prices were welcomed in the initial phase, but Mr. Kuroda has had to play down the merits of yen weakness now, which is a big change," she added.
Kuroda's predecessor Masaaki Shirakawa, a skeptic of the 2 percent target who fought a strong yen during his tenure, has called the BOJ's monetary policy over the decade a "great monetary experiment" that produced only a "modest" impact on growth and inflation. That experiment now rests on Ueda, who will become BOJ chief on Sunday.
"Of all the things we've learned firsthand, one thing is crystal clear. That is, monetary easing is not a panacea," Dai-ichi Life's Hoshino said.
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