Global Central Bank speaks of tough new economic reality in Tokyo

By playing Kihara

Tokyo (Reuters) – It is the Japanese version of the federal government’s Jackson Hole Symposium without trail hiking or viewing the scenery, and this year’s gathering of Tokyo’s global central bankers will focus on two unpleasant realities: flagging economic growth and sticky inflation.

The Bank of Japan and its associated think tanks will begin on Tuesday and will host a two-day annual meeting that includes notable US, European and Asian academics and central bankers.

While most of the speeches are inherently academic and closed to the media, this year’s theme is examining “new challenges for monetary policy,” particularly how central banks should address sustained inflation, downside economic risks, volatile markets and US tariffs.

These conflicting headwinds, the result of President Donald Trump’s policies, have created speed bumps for many central banks, whether they are raising interest rates and reducing them.

For example, BOJ is on track to continue raising interest rates and steadily taper bond purchases. This is in stark contrast to the peers of interest rate reductions, but recent global developments have raised questions about the pace of such movement.

“BOJs may be forced to PAT for a while, but there’s no need to throw away the hikes at the rate entirely,” said former BOJ civil servant Nobuyasu Atago. “When the environment appears correct, we need to communicate so that we can resume hiking at the rate.”

Federal Reserve officials, including New York President John Williams, European Central Bank, Bank of Canada and the Reserve Bank of Australia, are among the participants in the conference, which will be held at the BOJ headquarters in central Tokyo.

At last year’s meeting, participants gained experience fighting the economic recession by discussing lessons learned using a variety of unconventional currency mitigation tools.

They also discussed whether Japan, a Japan that kept interest rates ultra-low, could emerge from decades of deflation and low inflation, with signs of sustained wage growth, even if other major central banks were actively hiking.

There are concerns about the economic downturn caused by tariffs this year, but the topics in the meeting session show that holders are still sensitive to the risk of being caught up in sustained and too high inflation.

One session features “reserve demand, interest rate management, and quantitative tightening.” Another discusses a paper published in December by the International Monetary Fund (IMF) entitled “Monetary Policy and Inflation Scary.”

The paper explains how supply shocks could continue to be massive, such as those caused by the COVID pandemic. This is a warning of the dangers central banks face, assuming that they can look at the pressure of cost push prices.

Unstable policy

It may be a compelling message for major central banks facing a similar dilemma exacerbated by the World Trade War and Trump’s unstable trade policy.

The US Federal Reserve, originally thought to be on the course for more interest rate cuts, was forced into a standby game last week with officials warning of creeping inflation caused by tariffs.

Conversations with policymakers say the European Central Bank is expected to cut its fees again in June, but the incident has been suspended beyond that as the challenges of inflation creep up on the horizon.

“In the short term, tariffs could be fired, but they pose an upward risk over the medium term,” ECB Board member Isabel Schnabel, a candid policy hawk, told a meeting at Stanford University on May 9 in an explicit call for a suspension.

BOJ also faces the challenge of balancing domestic inflation pressures from US tariffs and growth risks.

Trump’s tariffs forced the BOJ to sharply cut its growth forecast on May 1, indicating a pause in the rate hiking cycle, with short-term interest rates remaining at just 0.5%.

Still, Governor Midorida shows he is ready to resume hiking rates if the underlying inflation stays on the course to achieve its 2% target.

Japan’s core consumer inflation reached a high of 3.5% in April, more than two years, as food prices rose 7%, and households suffered from an increase in living expenses.

“It’s clear that BOJ has failed to achieve its price stability mission,” said Atago, now chief economist at Rakuten Securities Economic Research Institute.

“Inflation has always been one of the worries of BOJs. This is probably already behind the curve when dealing with domestic price pressures.”

Ueno gave a keynote speech at the beginning of Tuesday’s meeting, followed by a lecture by Agustin Carstens, general manager of the International Bank for Reconciliation (BIS).

(Reporting by Reika Kihara, edited by Sam Holmes)

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