BOJ’s Flawed Goal Risks Upward Price Spiral, Says Ex-Deputy Head

The Bank of Japan’s determination to drive inflation to 2 percent risks sparking a damaging upward spiral in the cost of living, said a former deputy governor.

Prices of many products will need to rise at a faster rate than the goal to make up for a drag on the inflation index from distorted housing costs in the gauge, said Kiyohiko Nishimura, 62, who heads a government statistics panel. The upshot: the central bank is aiming for inflation that is “significantly” higher than its target implies, he said.

“The BOJ may say there’s 2 percent inflation, but if ordinary people perceive it to be 3 percent, inflation expectations will be more than it predicts,” Nishimura said in his first interview since leaving the BOJ in 2013. “That could lead to an upward spiral in inflation.”

Nishimura, who was at the central bank when it adopted the price target under former governor Masaaki Shirakawa, said the downward bias in the consumer price index could lead the BOJ to maintain unprecedented monetary stimulus longer than necessary, creating financial market bubbles. More accurately taking into account changes in the quality of rented housing over time would boost the gauge by as much as 0.3 percentage point, he said.

‘Hard’ Livelihoods

Rising living costs are squeezing households that haven’t seen wages keep up. Consumer spending hasn’t recovered from a hit by an increase in the sales tax last year, while a record 62 percent of households have described their livelihoods as “hard,” according to a government survey.

BOJ board member Koji Ishida and the central bank’s chief economist Eiji Maeda have highlighted the distortions caused by housing rent in the consumer price index. The statistics bureau is confident that it accurately measures rent in the consumer price index, Sei Ueda, director of the price data division at the bureau, said in May.

Japan’s consumer prices rose 0.5 percent in May from a year year, while the BOJ’s preferred measure which strips out fresh food, increased 0.1 percent, a fraction of the central bank’s 2 percent target.

Governor Haruhiko Kuroda set a two-year time frame in April 2013 to achieve the 2 percent target. The bank was sticking to that time frame, he said in April.

It could be difficult to boost inflation to even 1.5 percent for a while, said Nishimura, who is also a professor at the University of Tokyo. The statistics commission that Nishimura heads is conducting a regular five-year review of the nation’s CPI. Any changes will be reflected in the gauge by August next year.

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