TOKYO: The Bank of Japan must maintain ultra-loose monetary policy as recent cost-push inflation could hurt the economy, Governor Haruhiko Kuroda said on Tuesday, highlighting the widening gap with the US Federal Reserve’s aggressive tightening plan.

Kuroda said consumer inflation is expected to accelerate as some firms pass on rising energy and food costs to households.

“Instead of leading to higher wages and corporate profits, such cost-push inflation will weigh on the economy in the long run by hurting corporate profits and households’ real income,” Kuroda told parliament.

Bank of Japan says no tightening as oil stirs inflation

While nominal wages may increase “quite significantly,” the rise in consumer inflation may sap households’ purchasing power by pushing down price-adjusted real wages, he added.

“Given recent price developments, we need to patiently maintain our powerful monetary easing,” Kuroda said.

Kuroda’s remarks came in the wake of those by Fed Chair Jerome Powell, who pledged on Monday to move “expeditiously” to raise rates to keep an upward price spiral from getting entrenched.

The yen fell through the psychological 120 level against the dollar for the first time since 2016 on Tuesday, after Powell’s hawkish remarks raised bets on higher US rates and widened the policy gap between the Fed and a dovish BOJ.

As part of efforts to fire up inflation to its elusive 2% target, the BOJ currently caps long-term borrowing costs around zero. While it has slowed purchases of government bonds and exchange-traded funds (ETF) in recent years, it continues to hold huge amounts of assets on its balance sheet.

In the event the BOJ decides to reduce its ETF holdings, it will do so in a way that minimises the central bank’s losses and any disruption to financial markets, Kuroda said.

But it was premature now to debate an exit from easy policy, including how the BOJ could reduce its ETF holdings, with inflation yet to sustainably hit 2%, he said.