A further delay in the time frame for reaching the Bank of Japan’s price target would have more significance than two other postponements in the past year and would spell acknowledgment of a failure by the central bank, a former BOJ chief economist said.
“That’s going to be the declaration of defeat,” Hideo Hayakawa, who ended his 35-year BOJ career as an executive director in 2013, said in an interview Tuesday. “With the planned sales tax increase in 2017, they will completely lose the outlook of reaching the 2 percent price target.”
Governor Haruhiko Kuroda will end a two-day meeting on Friday in which people familiar with BOJ discussions said the bank will consider pushing back the timetable for reaching the inflation goal. Another extension would underscore the rising chances that the BOJ won’t meet the target before Kuroda’s term expires in April 2018, Hayakawa said.
With another sales tax increase scheduled for April 2017, that makes it less certain that the BOJ can reach its goal of sustainable 2 percent inflation, said Hayakawa, who is currently a senior executive fellow at Fujitsu Research Institute.
In 2014, Japan’s economy fell into a recession after the sales tax was raised that April. Six months later, Kuroda expanded the monetary stimulus program that he had started in April 2013 with an aim to hit the 2 percent price target in about two years.
Tapering before April 2017 “is a bit hard to imagine,” Etsuro Honda, an economic adviser to Prime Minister Shinzo Abe, said in July . “The BOJ will have to judge whether it can taper by looking at the degree of deceleration after the tax hike. When the economy is slowing, it can’t start tapering.”
The BOJ will be in a tough spot as inflation is slowing not only because of low oil prices, Hayakawa said.
“It will be hell either way” whether the BOJ expands stimulus or not, said Hayakawa, who was BOJ’s chief economist from 2001 to 2007. “More stimulus would shorten the life of the current easing program and no stimulus would generate doubts over the BOJ’s commitment to 2 percent price target.”
The most important factor in gauging the inflation outlook is the pace of base wage increases, and requests by the labor unions for smaller gains this year makes it certain that it won’t accelerate, Hayakawa said.
While Toyota Motor Corp. is forecasting record profits for the year ending in March, its umbrella labor group representing workers said it is cutting in half the minimum increase it’s seeking for next fiscal year compared with the talks this year.
“I really don’t understand why the labor unions couldn’t ask more when companies are making record profits,” Hayakawa said. “It dealt a fatal blow to the BOJ. ”