The government will review the agreement with the BOJ to make the price target more flexible

The Japanese government is ready to revise a decade-old agreement with the Bank of Japan that states the central bank will aim to reach its 2 percent inflation target “as soon as possible”, sources said on Saturday governmental

In the first review since the joint agreement was made in 2013, the government will consider relaxing the price target, the sources said. Prime Minister Fumio Kishida is expected to work out the details with the next BOJ governor, who will succeed Haruhiko Kuroda in April.

The expected review could lead the BOJ to modify its bold monetary easing as the knock-on effects of its ultra-low interest rate policy, notably the yen’s sharp depreciation against other major currencies, have become more obvious and represent a challenge for the Kishida administration.

Under Kuroda, the BOJ remains committed to keeping borrowing costs at lower levels for households and businesses to support the economy, swimming against the global tide of monetary tightening. The joint statement, which mentions the role of the government and the BOJ in supporting economic growth, is widely seen as forcing the bank to meet its inflation target. The review aims to expand policy options for the BOJ, the sources said.

But the government and the BOJ are of the view that monetary easing is still necessary. They assess that, although the Japanese economy is no longer in a state of deflation, it has yet to enter a virtuous cycle of rising prices and wage growth.

To prevent the revision from being interpreted by markets as a departure from monetary easing – a development that could lead to a stronger yen and a rise in Japanese government bond yields – the 2% inflation target will be maintained, according to the sources

Possible changes would include removing the phrase “as soon as possible” or changing the wording of the agreement to make it clear that the 2 percent target should be reached in the medium and long term. Promoting wage growth could be added to the revised document as a challenge for the government.

Kuroda has publicly denied his intention to remain as governor beyond his current term which ends on April 8, 2023. Kishida must select a candidate to succeed Kuroda for parliamentary approval.

Current and former BOJ deputy governors Masayoshi Amamiya and Hiroshi Nakaso are among the possible candidates.

The current joint statement was issued in January. On December 22, 2013, when Kuroda’s predecessor Masaaki Shirakawa was governor, and the BOJ, under pressure from the government, decided to introduce the 2% price stability target.

Then-Prime Minister Shinzo Abe had then urged Shirakawa to agree to adopt the 2 percent target despite the governor’s reservations. Shirakawa stepped down in March before his term ended.

Abe chose Kuroda, a former Japanese foreign exchange diplomat who served as president of the Asian Development Bank, to succeed Shirakawa. Kuroda then embarked on bold monetary easing, a key feature of Abe’s “Abenomics” program to boost the economy.

After about a decade of very loose monetary policy under Kuroda, the inflation target has yet to be achieved in a “stable and sustainable” manner, as described by the BOJ.

According to the bank’s projections, core consumer prices in Japan will rise 2.9 percent from a year earlier in fiscal 2022, but the increase will slow to 1.6 percent in fiscal year 2023 from April.

Still, core consumer prices in Japan, the key gauge of inflation, have remained above the BOJ’s 2 percent target for seven months, boosted by higher energy prices and a weak yen

To ease the pain of rising prices amid Russia’s war in Ukraine, the Kishida government has taken steps to ease inflation and has stepped into the foreign exchange market on several occasions this fall to stem the yen’s sharp decline, which raises import costs for resource-poor Japan. . .

Kuroda has argued that cost-push inflation will be temporary and that the BOJ should maintain its ultra-low rate policy to support the economy, making it an outlier among major central banks that have started to raise interest rates.


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