Fumio Kishida supports the Bank of Japan’s ultra-loose policy despite the yen’s plunge

Fumio Kishida has signaled his support for the Bank of Japan’s ultra-loose monetary policy, even as the yen has fallen to its lowest level since the 1970s in real terms.

In an interview with the Financial Times, Japan’s prime minister said the central bank must maintain its policy until wages rise and urged companies that raise prices to raise wages as well.

Kishida said he will continue to “work closely” with Haruhiko Kuroda, ruling out speculation that he would end the BoJ governor’s term early or use political pressure to end negative interest rates.

“Right now, I’m not thinking of reducing his term,” Kishida said, referring to Kuroda’s 10-year tenure as BoJ governor, which will end next spring. “I will look to the expected economic conditions in April next year as I consider selecting the right person for the job.”

In a sign of how stark Japan’s economic challenges contrast with those in other advanced economies struggling to protect the public from runaway inflation, Kishida said the country needs wage increases, not wage moderation.

The government will prepare measures to help companies raise salaries even as they pass on rising input costs, Kishida said. His comments came amid growing public concerns about the rising cost of living and a sharp decline in the prime minister’s popularity.

“By passing on rising prices, we hope companies have some leeway to increase wages,” he said. “In the past, wage increases were seen as a cost, but in the future companies need to invest in people to grow the economy and the companies themselves.”

The BoJ’s policy stance, which has helped push the yen to a 24-year low against the dollar, is being offset by government moves to fight inflation and take advantage of the weak yen to boost exports and tourism.

The PM’s comments followed a volatile period for the yen and mounting speculation that after nearly a decade of an unwavering commitment to its ultra-loose policies, global turmoil may finally force the BoJ to blink.

Just before Kishida spoke to the FT, the yen fell to ¥145.60 against the dollar and as low as ¥0.30 to the level at which the Japanese authorities intervened last month. Such efforts to strengthen the yen, which have cost $20 billion, will have little effect as long as the Japan-US interest rate differential continues to widen, analysts have warned.

Japan is facing the same pressures as the US and Europe from rising global energy and food prices. But headline inflation remains relatively low at 3 percent as there has been almost no transfer from price increases to higher wages. The rise in energy prices was also partially offset by long-term contracts for Japan’s large imports of liquefied natural gas.

The BoJ has argued that underlying consumer demand in the Japanese economy is weak and forecast inflation will fall back below 2 percent in the next fiscal year.

Businesses, particularly small and medium-sized enterprises, which employ 70 percent of workers, have struggled to pass higher costs on to consumers, putting pressure on profits that made it difficult for them to raise wages.

After decades of deflation, economists said Japan could be on the cusp of an historic transition as the global energy crisis is forcing companies to raise the prices of their products, creating pressure that will prompt workers to demand a wage increase.

“It’s difficult to quantify what level of inflation is appropriate,” Kishida said. “But I firmly believe that we would not be able to sustain a sustainable economy or protect people’s livelihoods without seeing a wage increase to match price increases.”