BOJ’s Sato says labor reform must accompany monetary easing

File photo: Takehiro Sato speaks during an interview with Reuters at the central bank in Tokyo

TOKYO (Reuters) – Bank of Japan board member Takehiro Sato said labor market reform and other measures to boost Japan’s growth potential must accompany monetary easing to raise the country’s low long-term inflation expectations.

Prolonged economic stagnation has pushed down long-term inflation expectations to around zero percent, and it is not easy to raise them even through massive monetary stimulus if monetary policy is the “only game in town,” Sato said in a speech at Yale University on Tuesday.

“Given that monetary policy on its own has limited effects, it is vital to make steady efforts, such as through labor market reform … to change Japan’s conservative inflation expectations,” Sato said in the text of his speech posted on the BOJ’s website on Wednesday.

Japanese companies and labor unions have traditionally prioritized job security over pay rises, a practice that has restrained wage increases and worked to push down long-term inflation expectations, Sato said.

By changing such practices and increasing job flexibility, Japan can boost labor productivity and potential growth. That would, in turn, increase corporate profits and household income, helping to accelerate inflation and strengthen the effect of monetary easing, he said.

“Given that there is an increasing sense of labor shortage caused by Japan’s population decline, now is an ideal time to take a step forward in labor market reform,” Sato said.

(Reporting by Leika Kihara; Editing by Eric Meijer)