Bank of Japan Gov. Haruhiko Kuroda, as he began his second five-year term this week, reiterated his resolve to do all he can to achieve the annual 2 percent inflation target, which was set as a yardstick in the joint efforts by the BOJ and the government to bust deflation when he took the helm of the central bank in 2013. Five years on, that goal — which he was initially confident of achieving within two years — remains elusive. The question that now should be asked is whether the target needs to be maintained and tied to an exit from the BOJ's massive monetary stimulus.
The economy is in good shape, with gross domestic product expanding for eight quarters in a row through the October-December period. As the Kuroda-led BOJ maintained its unprecedented program of monetary easing, corporate earnings and employment conditions improved significantly. Combined profits of major listed companies are estimated to have set record highs for two years in a row, although they continue to rely on a weak yen and brisk demands in overseas markets. The jobless rate has hit a 24-year low, while the job market is at the tightest level since the mid-1970s. Although the rise in consumer prices in the latest monthly data is just halfway to the 2 percent inflation target, it seems certain that the economy is no longer gripped by a deflationary spiral in which persistent declines in prices depress economic activities.
Kuroda maintains that it is premature to discuss an exit strategy, noting that the 2 percent inflation target is still too far off. True, the economy faces risks, notably the recent pickup in the yen's value and the threat of a trade war from the administration of U.S. President Donald Trump, which has embraced hawkish protectionism. In the BOJ's latest tankan survey, the business sentiment of large manufacturers took a turn for the worse for the first time in two years. A hasty discussion of an exit from the monetary easing might indeed sow seeds of confusion in the market.