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[HIROSHIMA] Bank of Japan Deputy Governor Hiroshi Nakaso said the services sector has streamlined operations to avoid passing labour costs on to consumers, but there are signs that companies will raise prices in the future.
Mr Nakaso, in a speech to business leaders in Hiroshima, western Japan, also expressed confidence that inflation will reach the BOJ's 2 per cent price target around fiscal 2019 and said the BOJ should stick with its quantitative easing programme.
A pickup in consumer spending, rising exports, and an improving output gap are all reasons to be positive about the outlook, but many economists still argue that the BOJ's inflation forecasts are overly optimistic.
The BOJ last week kept monetary policy steady but once again pushed back the timing for achieving its elusive inflation target, reinforcing views it will lag well behind other major central banks in scaling back its massive stimulus programme.
"Companies are trying to absorb higher labour costs by revising their business processes," Mr Nakaso said on Wednesday.
"The BOJ doesn't expect this to continue for ever. The output gap is clearly improving, so companies will become more aggressive in setting wages and prices." Mr Nakaso gave a few examples of corporate streamlining: some companies in retail and dining have responded to a labour shortage by shortening their business hours instead of raising wages to attract workers.
Some companies are also investing in labour-saving technology, such as self-checkout tills, which allows companies to maintain their current level of service with less workers.
Such behaviour has allowed companies to avoid passing higher costs on to consumers, but there are signs that sentiment is turning, Mr Nakaso said.
The BOJ's tankan survey for June shows shipping, wholesale, retail, and hospitality firms are considering raising prices in the future.
Despite the short-term negative impact on wages and prices, investment in labour-saving technology should be welcomed because it raises productivity in the long term, Mr Nakaso said.
It also important to put structural policies in place to make the labour market more fluid, Mr Nakaso said.
The BOJ has now postponed the inflation target timeframe six times since Governor Haruhiko Kuroda launched his huge asset-buying programme in 2013.
Japan's core consumer prices rose just 0.4 per cent in May from a year earlier.