Business / Economy

BOJ struggling to meet inflation deadline, former vice governor says

by Toru Fujioka and Masahiro Hidaka


The Bank of Japan may need more time to achieve its 2 percent inflation target and the country can’t ignore harm caused by an abrupt weakening of the yen, said Toshiro Muto, a two-time contender to lead the central bank.

“The hurdle is pretty high to meet the price goal within their targeted time period of about two years,” said Muto, 71, a former deputy governor who is now chairman of the Daiwa Institute of Research. “It’s a realistic approach to push back the timing.”

Even as the yen’s decline to a six-year low against the dollar swells Japan’s import bill, price gains have slowed to 1.1 percent. Companies surveyed by the BOJ are forecasting inflation lower than its goal for the next five years.

Muto, who served at the BOJ for five years through March 2008, was the government’s first choice for the top job that year, only for his nomination to be rejected by Upper House lawmakers who saw his Finance Ministry background as a threat to the BOJ’s independence. He was a contender again last year before Prime Minister Shinzo Abe settled on Haruhiko Kuroda.

Big exporters and manufacturers may profit from the weakening yen while small companies struggle to pass on increasing costs, Muto said in an interview Wednesday. He declined to comment on an appropriate level for the yen and said it was the speed of changes in currency levels that were more important.

“The negative impact of abrupt weakening of the yen probably outweighs the benefits for now,” he said. “For the time being, we can’t ignore the negative impact.”

The government has asked 431 organizations to cooperate with small and midsize enterprises that are trying to pass on rising raw material and energy costs as the yen weakens, the Ministry of Economy, Trade and Industry said in a statement.

Former Finance Minister Hirohisa Fujii said this week that further falls in the yen may trigger currency intervention, and Natsuo Yamaguchi, leader of Komeito, the ruling coalition’s junior member, said the BOJ and the government should work to ensure currency stability.

Kuroda has said a weak yen is good for the economy and that Japan is likely to reach the 2 percent target around the year starting in April 2015. Eighty-seven percent of economists surveyed by Bloomberg News say that’s not achievable, while the International Monetary Fund forecasts inflation will be sustained at 2 percent from 2017.

Like the weakening yen, the question of whether Abe should raise the consumption tax to 10 percent next year is a subject of debate among policymakers. The economy had its steepest contraction in five years after the levy was hiked to 8 percent on April 1.

“Not raising the levy would come from the judgment that economic conditions aren’t good enough, and that’s like the government admitting ‘Abenomics’ isn’t bearing fruit,” Muto said. “If they think the economy will struggle even with a postponement, talk will turn to the inevitability of fiscal spending and monetary stimulus.”

Further monetary easing is also another option for the BOJ to help achieve its inflation target, Muto said. The most realistic option for any easing would be increased bond purchases, he said.

Kuroda may come under political pressure to ease further to support the economy before any tax hike.

“The timing of further easing may not be so irrelevant to the decision for raising the sales tax,” Muto said. “To make the most of the power of easing, the government would want to say they implemented all of available measures when they announce to raise the levy.”

Consumer price gains excluding fresh food slowed more than forecast in August to 3.1 percent, according to data from the Statistics Bureau last week. Stripped of the effects of April’s tax increase, core CPI, which excludes fresh food but not energy, climbed 1.1 percent.

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