Sixth Postponing of Inflation Target

At the Monetary Policy Meeting on Thursday, Bank of Japan decided to postpone its goal for achieving 2% growth of inflation target from “around 2018” to “around 2019.” It was the sixth time for BoJ to delay the goal, which originally had been within two years from April 2013. Governor Haruhiko Kuroda literally abandoned the achievement within his term expiring next April.

BoJ actually has an optimistic view on the development of consumer price index. “The year-on-year rate of change in the CPI is likely to continue on an uptrend and increase toward 2 percent, mainly on the back of the improvement in the output gap and the rise in medium- to long-term inflation expectations,” says the Outlook for Economic Activity and Prices, released after the meeting.

So, why the bank had to postpone its goal for targeted inflation? “Comparing with the current projections with the previous ones, although the projected rates of increase in the CPI are lower mainly for the first half of the projection period, a virtuous cycle between a moderate raise in the inflation rate and wage increases is likely to start operating gradually toward the end of the projection period,” explains BoJ. While the past was worse than expected, it still sees the future to be good. The bank concluded that the timing of the year-on-year rate of change in the CPI reaching around 2% would likely be around 2019.

Under highly unusual monetary easing by BoJ, which caused law-valued Japanese yen, Japanese exporters earned a great amount of profit. However, those corporations did not appropriately redistribute the profit to their employees and accumulated it as internal reserves. Wages are still kept in low level. “Corporations and families still embrace a principle that wages and consumer prices will not be raised. Deflation mind affects,” said Kuroda in press conference after the meeting.

The original scenario of BoJ monetary easing was that the people would believe in future hike of consumer prices, leading to positive balance of corporations and higher wages. But, introducing 8% consumption tax rate in 2014 or decline of crude oil price damaged BoJ policy. Surprises like further quantitative easing or negative interest rate did not work well, only resulting bringing confusion to the market.

Experts demand BoJ the strategy of exiting this unprecedented monetary easing. Accumulation of governmental bond in BoJ has been swollen to the level of pessimistic concern on sudden rise of long-term interest rate, when the bank would start selling it. BoJ does not show any sign of exit strategy. It looks like being bound by political concern of apparent failure of Abenomics led by Prime Minister Shinzo Abe.