BOJ deputy governor warns of uncertain wage path, vows to keep easy policy

© Reuters. FILE PHOTO: Bank of Japan Deputy Governor Masayoshi Amamiya speaks during a Reuters Newsmaker event in Tokyo, Japan July 5, 2019. REUTERS/Issei Kato

By Leika Kihara

TOKYO (Reuters) -Bank of Japan Deputy Governor Masayoshi Amamiya on Thursday stressed the need to keep monetary policy ultra-loose due to uncertainty on whether wages will increase enough to compensate households for the rising cost of living.

While household spending is recovering, wages must rise at a faster pace than inflation for consumption to keep increasing and help Japan's economy recover from a pandemic-induced slump, Amamiya said in a speech.

"Japan's economy hasn't recovered yet to pre-pandemic levels," with rising global commodity costs causing a painful outflow of income due to the country's heavy reliance on fuel and raw material imports, he said.

"The foundations for an economic recovery remain weak and the outlook for wages is highly uncertain. As such, we need to support economic activity with accommodative monetary policy," Amamiya said.

Japan's core consumer price index (CPI), which excludes volatile fresh food costs but includes those of energy, rose 2.2% in June from a year earlier, exceeding the central bank's 2% target for three straight months.

Amamiya stressed that such temporary rises in inflation, driven by external factors such as higher fuel costs, will not be enough to justify withdrawing the BOJ's massive stimulus.

"Achieving our price target means having consumer inflation hit 2% on average over the business cycle, not a temporary rise to that level driven by exogenous factors such as increasing energy import costs," he said.

The rising cost of living is causing particular pain to households, as companies remain reluctant to hike wages due to uncertainty about their business outlook.

Inflation-adjusted real wages, a key gauge of consumers' purchasing power, fell 1.8% from a year earlier, extending a decline to post the biggest year-on-year drop in nearly two years.