The Bank of Japan’s latest delay in reaching its 2 percent inflation target despite more than four years of aggressive monetary easing has cast a shadow over Gov. Haruhiko Kuroda’s chances at a new term.
On Thursday the BOJ pushed back the timing of achieving the target to around fiscal 2019, the sixth time it has done so since Kuroda implemented the bank’s ultra-easy policy in April 2013.
“(2 percent) is still an unrealistic target, even if they push the timing back,” said Sayuri Shirai, a former member of the BOJ’s policy-setting board who is now a professor at Keio University.
“It’s so far off from what financial markets actually expect. A target of 1 percent for the time being would be more appropriate,” she said.
The BOJ has struggled at every turn to reach the target as tepid wage growth damps consumers’ willingness to spend, making it hard for businesses to raise prices. Crude oil prices have yet to make a full recovery from last year’s lows, further clouding the outlook for inflation.
The central bank will not be able to hit the goal even if it continues its monetary easing over the next 10 years, an analyst at a major financial institution said.
Toshihiro Nagahama, chief economist at the Dai-ichi Life Research Institute, said the central bank knows the 2 percent target is virtually impossible to attain under current conditions but cannot revise it without causing a rapid strengthening of the yen that would deal a huge blow to Japan’s export-driven economy.
“Abenomics, with its reliance on monetary policy, has reached its limit,” he said, referring to Prime Minister Shinzo Abe’s economic policies.
Kuroda’s current term ends next April, and many analysts have floated the idea of the 72-year-old former Finance Ministry official serving a new five-year term to see the central bank through to the inflation target and subsequent exit from easing.
But another former board member, Nobuyuki Nakahara, said conditions have changed since Kuroda took up his post in 2013 and he “should make way for someone else, for the good of the country.”
After the 2008 financial crisis, major central banks including the U.S. Federal Reserve, the European Central Bank and the BOJ implemented aggressive easing measures such as zero percent interest rates and asset purchases.
But the BOJ has fallen far behind its peers in normalizing policy. The Fed ended its zero interest rate policy in late 2015 and has since raised rates three more times.
Chairwoman Janet Yellen said last month “additional gradual rate hikes are likely to be appropriate over the next few years” and that the Fed will begin trimming its balance sheet this year.
The ECB has also said it will not cut interest rates any lower, signaling a step toward normalization.
Analysts say the global shift toward tighter policy may make it difficult for the BOJ to keep interest rates low, as those in other countries begin rising.
If the BOJ is forced to raise its guidance for interest rates, it could become another hurdle to reaching its inflation target.
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