Still Hoping Inflation

Achieving two percent inflation target in two years has already failed, because two years have already passed from when the policy was announced. Governor of Bank of Japan, Haruhiko Kuroda, finally admitted that achievement of the target would be delayed and it will be the first half of FY 2016. So, what was his reasoning? He explained that trend of commodity price was stably improving, as he had been saying for over two years. Now, two percent target is a matter of rhetoric.

In the monetary decision making meeting at the end of last month, BoJ reduced the outlook of consumer price index in FY 2015 and 2016. CPI in FY 2015 was assumed to be 0.8%, two points down from former outlook, and it would be growing up to 2.0% in FY 2016, also reducing two points from last prospect. The expression of the inflation target has been changed from “in a period centered by FY 2015” to “in around the first half of 2016.”

Two years ago, Kuroda announced that BoJ would target two percent inflation within two years. Then, he changed his words as “mostly” two years. The expression later appeared to be “in a period centered by FY 2015.” He even gave up implementing that revised target, but he still had new target that was the first half of 2016. Who does believe in his words anymore?

BoJ still believes that trend of getting rid of deflation will not change. Kuroda’s insistence that CPI would be growing in the second half of FY 2015 sounded like a magic spell. Basic idea for inflation that positive management of private companies and growing wage will support moderate inflation has shown no persuasive evidence so far. Even if the inflation target is achieved in a certain short period in the future, Japanese economy will face serious difficulty in next consumption tax hike in April 2017.

Analysis that Japanese economy has already absorbed the impact of last consumption tax hike in April 2014 does not reflect actual trend. Consumers are still confused with the change in prices of goods. Some shops display price tags without including consumption tax in order to avoid expensive image. When a customer brings a shampoo or toothpaste to check-out counter of a drugstore, he or she is told different price, which is higher than expected. “Are you charging for different thing?” says the customer. It is something frequently seen in every retail shops.

As long as Shinzo Abe administration continues obsolete infrastructure-oriented stimulus policy, Japanese economy will not fundamentally boost. If BoJ rigorously keeps on inflation target policy, unnecessarily high commodity price will have negative impact on consumers. Pep pills do not work for an economy exhausted by an unusual natural disaster only four years ago.