Hoshi remarks that "unless the BOJ raises rates, inflation could accelerate too much". Adding that "the same kind of inflation seen in the US and Europe could very much happen in Japan". For some context, Hoshi was also a participant in the BOJ's workshop held on 21 May and chaired a session that scrutinised Japan's economic and price developments.
His take is that there is a significant risk that inflation could stay higher above the BOJ's target and that is a risk that Ueda & co. need to be worried about. His argument is that recent wage-inflation dynamics are changing in ways not seen before in the past in Japan. And that will see intensifying labour shortages, thus pushing up labour costs and leading to more firms to raise prices down the road.
As for when the BOJ might hike next, Hoshi declined to offer up a timing on that. But he said that the BOJ should hike rates "steadily" while also taking into account its policy stance on the yen exchange rate.
It's fair game to expect price pressures to hold up given the recent developments in Japan's economic landscape. The spring wage negotiations in the last two years have been a step in the right direction to try and defeat the deflation mindset.
But after eight years of negative rates and two decades of having to deal with near zero inflation, you can pardon me for still being skeptical that things could so easily change. There's also the demographic problem to address in the long run.
Then again, Covid has been the perfect brew of ingredients for Japan to dig themselves out of this hole. If they can't capitalise on this opportunity and build on it, we probably would not have seen this change in our lifetimes.
