T he government of Prime Minister Shinzo Abe and the Bank of Japan agreed last week to set a 2 percent inflation target to be achieved "as soon as possible." All sorts of issues have been raised, from the dangers of intervening in monetary policy to the waning independence of the central bank, but there are many problems inherent with inflation targeting.
The first problem is that the joint accord merely clarified their target — 2 percent inflation — without specifying the tools to be used to achieve it.
"Abenomics" is aggressive on monetary policy, flexible on fiscal policy and attempts to encourage private-sector investment. The BOJ will likely come under greater pressure than ever to expand quantitative easing. But the results of its ultraeasy monetary policy have been quite limited over the past two decades, and we cannot expect monetary policy alone to drive economic growth in any substantial way. Abe's administration is well-aware of that, which is why his Cabinet adopted a ¥20 trillion stimulus package on Jan. 11. That, of course, entails the problem of expanding the fiscal debt.