Different Dimensional Failure

Bank of Japan announced its perspective of commodity price hike in FY 2015 to be 1%, declining from 1.7%. Although the bank has been maintaining its inflation target of 2% in two years, it obviously became unlikely to reach it by March 2016. Since bold monetary policy has been the first arrow, or frontrunner in other words, of Abenomics, waning perspective of BoJ represents steep decline of economic policy of Prime Minister Shinzo Abe. Now Abenomics is now a matter of rhetoric.

In the press conference after decision-making meeting of BoJ on Wednesday, Governor Haruhiko Kuroda admitted that the achievement would be delayed. “It is highly possible that ratio of commodity price will reach 2% in and around FY 2015,” he reiterated, indicating likeliness of the achievement to be as late as FY 2016 or later. Main reason of the delay was low price of oil. “It is true that the timing of reaching 2% will move, because of volatility of oil price,” Kuroda explained.

It was early April of 2013, when Kuroda boldly announced BoJ’s policy to go forward to 2% hike of commodity price within two years. He named his policy “different dimensional monetary easing,” with convincing smile on his face. “I didn’t say it would be in FY 2015,” told Kuroda on Wednesday. You’re wrong, Governor. Two years from April 2013 must be this April. The end of FY 2015 will be March 2016. Even if BoJ achieves that 2% target at the end of FY 2015, it will still be three years from his announcement.

Nobody believes that the bank will achieve its two-year target. Growth rate of consumer price in last November was 0.7%, even lower than 1%. The growth rate is predicted to be declining further. But the bank is still optimistic, because it believes that mechanism of inflation is still working even in the low oil price. BoJ has positive perspective in FY 2016, in which it raised its target of commodity price hike from 2.1% to 2.2%, with expectation of oil price hike with no clear reason.

Abe postponed consumption tax hike, which was once planned to be introduced in this October. Leaders of Abe administration expect higher wage in this annual spring negotiation between employers and workers. They also hope positive spending of budget with infrastructure-leaning stimulus policy will contribute to economic growth. But no economic theory supports their expectation of higher wage. The effect of traditional stimulus policy of Liberal Democratic Party is limited as it has been.

What the administration needs to do is to admit its failure to achieve 2%-in-2-year policy and reconstruct its economic policy. As long as Abe is saying “there is no alternative way,” there will be no sustainable growth in Japanese economy.