The Bank of Japan has once again pushed back the forecast for achieving its target of a 2 percent annual inflation to pull the economy out of deflation. When BOJ Gov. Haruhiko Kuroda launched the “unprecedented” monetary easing operation — a centerpiece of Prime Minister Shinzo Abe’s trademark “Abenomics” policies — in April 2013, he said he was confident the inflation goal would be attained in about two years. That forecast was pushed back last April to “around the first half of fiscal 2016” and postponed last week to “around the latter half of fiscal 2016.”
Kuroda did so as the BOJ lowered its estimate for real-term growth in Japan’s gross domestic product and consumer price increases in fiscal 2015 and 2016, reflecting the impact of China’s slowdown on Japanese output and exports along with the slow recovery in consumer spending.
The BOJ governor attributed the postponement to the fall in crude oil prices that has continued longer than anticipated and insisted that the underlying price trend was steadily improving — a claim backed by a 1.2 percent increase in consumer prices, excluding energy costs, in September. He stressed that the BOJ’s operation to expand the monetary base through its massive purchase of government bonds and exchange-traded funds was still working, and said the central bank was ready to take additional steps if necessary to achieve the targeted inflation.
Instead of postponing the inflation target, the BOJ should be reviewing the target itself and the policy framework for achieving it — which is having lopsided effects on the economy. An additional easing could drive the yen even lower against other currencies, further pushing up import costs and hurting household coffers that have already suffered from prices rising faster than wages.
A major problem with the current BOJ policy is that it effectively relies on the monetary policy-induced fall of the yen as a tool for ending the deflation that had gripped the nation since the 1990s. The bank denies that its massive monetary stimulus is aimed at influencing currency exchange rates. But it is undisputable that the yen’s value fell sharply as a result of its policy, and that the weaker yen boosted the earnings of export-led companies to record levels while pushing up prices by making imports more costly. Over the past 2½ years, the weak yen clearly benefited major corporations with global business operations by pushing up their earnings in yen terms, while the higher cost of imports increased the burden on households and many small and medium-size companies.
In September, the nationwide consumer price index fell 0.1 percent from a year earlier, the second consecutive monthly decline following the CPI’s first fall in 28 months in August. The falling cost of oil pushed down energy prices such as electricity, gas and gasoline by 12.1 percent. However, food prices excluding perishable products rose 1.9 percent — an indication that prices of goods directly linked to consumers’ daily lives continue to rise. Average household spending in September fell 0.4 percent from a year ago for the first decline in two months.
The BOJ’s “unprecedented” easing through the asset purchases has also pushed up the stock market and real estate prices. But whether most Japanese consumers have benefited from the rising share prices and real estate boom is questionable. Here again, the benefits of the BOJ’s policy appear to be uneven and limited.
On the other hand, there are undesirable side effects of the BOJ’s easing. The massive purchase of government bonds by the central bank has lessened the government’s sense of crisis on the need for fiscal reconstruction. The outstanding amount of long-term bonds that the BOJ has purchased for the easing operation reached ¥267 trillion, or about 30 percent of the outstanding issue of government bonds, raising fears of possible negative impacts on the market. While Kuroda talks of additional easing steps, there are views that room for the BOJ to further expand its asset purchases is narrowing.
There are multiple factors at play that are sapping Japan’s potential for economic growth and keeping prices from rising, including the accelerating population decline due to the low fertility rate, persistent concern over sustainability of social welfare, and the growing ranks of poorly paid irregular workers. Monetary policy alone can’t solve all these problems.
Finance Minister Taro Aso said last month that it’s difficult for inflation to pick up while crude oil prices are falling, noting that there are limits to what monetary policy can do to achieve the 2 percent inflation target under the current circumstances — a remark taken to indicate that the need for additional easing by the BOJ is small. Prices are stagnant not because there isn’t enough money in the market but because there isn’t enough demand, he said.
It is questionable if sticking to the 2 percent inflation target even if it involves undesirable rises in import costs due to the weaker yen will have widespread public support as a monetary policy. The BOJ should reflect on the limitations of what its monetary policies can do, and review the inflation target and the policy framework to end deflation.
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