Losing Target in Monetary Policy

Bank of Japan begins to reconsider its inflation target, which has been the core of economic policy in Shinzo Abe administration, or Abenomics. Realizing difficulty to achieve 2% hike of commodity price by the end of FY 2017, BoJ is going to delay the time limit to FY 2018 or later. The term for BoJ Governor, Haruhiko Kuroda, will be expired around at the end of FY 2017, or April 8^th of 2018, without expected achievement of its monetary policy.

BoJ delivers quarterly report on commodity price. Next report will be issued at the end of Monetary Policy Decision Meeting held on October 31^st and November 1^st, which will show perspectives for three years between FY 2016 and FY 2018 with edition by nine members of Policy Committee including Governor Kuroda. At the time of last report in July, the bank estimated average rate of price rising to be 0.1% in FY 2016, 1.7% in FY 2017 and 1.9% in FY 2018. For some unidentified reasons, last report concluded that commodity price would reach the target of 2% in FY 2017.

The bank will change that estimation in next report. New analysis expects the average rate of inflation in 2017 to be within the lower half between 1% and 2%. The time for achieving 2% inflation will be delayed from the set limit of “within FY 2017.” Caused by price down of crude oil and negative trend of domestic consumption, inflation rate has been declining for consecutive 6 months.

In the discussion of Committee on Finance and Monetary Affairs of House of Representatives on Friday, Kuroda admitted the possibility of changing his policy. “It is possible for us to review the limit of FY 2017. We have realized that price target can be lowered,” said Kuroda. One member of a council in the bank also approved the view of delay.

BoJ shifted its monetary policy from focusing on quantity of buying national bonds to handling of interest in September. It has already been recognized as dismissing of 2% inflation target policy in the market. “The idea of achieving it only through monetary policy was incompetent,” told an economist. Expectation for further monetary easing is rapidly shrinking.

Negative effect of new policy in September has been appearing. In the policy of leading long-term interest rate around 0%, BoJ is likely to reduce its purchase of national bonds to raise the rate, when its rate gets into the minus. It will invite skepticism of market on the manipulation of BoJ. BoJ policy looks like distorting market economy.