January 02, 2023: -On Monday, Bank of Japan Governor Haruhiko Kuroda touched aside the possibility of a closer-term exit from the ultra-loose monetary policy but voiced hope that intensifying labour shortages will prod the companies to raise wages.

Kuroda stated that the BOJ’s decision final week to widen the allowance band nearly its yield target was aimed at enhancing the effectiveness of its ultra-easy policy rather than an initial step toward withdrawing its massive stimulus program.

“This is not a step toward an exit. The Bank aims to achieve the price target sustainably and stably, accompanied by wage increases, by continuing with monetary which eases under yield curve control,” Kuroda said in a speech given to a meeting of business lobby Keidanren.

He also said Japan’s average consumer inflation would likely slow less than the BOJ’s 2% target in the coming fiscal year as the effects of soaring import costs dissipate.

But Kuroda stated that wage growth would likely increase due to intensifying labour shortages and structural changes in Japan’s job market, which lead to higher pay for temporary employees and a rise in permanent workers.

“Labor market conditions in Japan are focusing on tightening further, and firms’ price-setting behaviour is likely to change,” Kuroda said.

“In this sense, Japan is closing a critical juncture in breaking out of a prolonged time of low inflation and growth,” he said.

The wage increase’s strength is key to how soon the BOJ could increase its yield curve control targets, setting at -0.1% for short-term interest rates and nearly 0% for the 10-year bond yield.

The BOJ shocked markets the previous week with a surprising band widening around its 10-year yield target. Kuroda had stated the move, which allows long-term rates to increase more, as aimed at easing some of the costs of a prolonged stimulus rather than a prelude to full-fledged policy normalization.

With inflation exceeding its 2% target, markets are rife with speculation that the BOJ will increase the yield targets when the dovish governor Kuroda’s term ends in April of the coming year.

While more firms are starting to hike prices, passing on higher costs to households, the BOJ must examine if such changes in corporate price-setting behaviour will take hold as a recent norm in Japan, Kuroda said.

He said that the outcome of next year’s spring wage negotiations between big firms and unions would also be critical to the outlook for wage growth.

At the same gathering, Prime Minister Fumio Kishida, known for business leaders’ help in achieving high wage growth to compensate households for the rising cost of living.