Kuroda Deputy Casts Doubt on Commitment to Inflation Time Frame

  • Bank of Japan has repeatedy pushed back forecast for CPI goal
  • Abandoning two-year time frame would reduce pressure on BOJ

The Bank of Japan’s commitment to a time frame for meeting its 2 percent inflation target may be waning.

QuickTake Abenomics

"Two years has already passed, so I think that discussing this point is not very meaningful," Deputy Governor Hiroshi Nakaso told reporters in Tokyo on Thursday. Nakaso said the central bank is still intent on reaching 2 percent, and in doing so as soon as possible.

Hiroshi Nakaso
Hiroshi Nakaso
Photographer: Kiyoshi Ota/Bloomberg

The BOJ’s commitment to a two-year timetable that was first made more than three years ago has become increasingly problematic. While it’s intended to underscore a determination to drive prices higher, and change sentiment accordingly, the obvious failure to meet the goal has eaten away at the central bank’s credibility. It has also stoked volatility in markets as investors look to the time frame in an effort to anticipate the BOJ’s next move in monetary policy.

After more than three years of unprecedented stimulus, the BOJ is as far from its price goal as ever. Consumer prices excluding fresh food, a key gauge for BOJ, fell 0.5 percent in July, the weakest number since Governor Haruhiko Kuroda took helm in March 2013.

"The BOJ is probably thinking that the two-year time frame is doing more harm than good,”said Shinichiro Kobayashi, a senior economist at Mitsubishi UFJ Research & Consulting. "Ditching the time-frame will ease excessive expectations for easing at each policy meeting and reduce market volatility. But the next question will be: What does the BOJ mean by saying it will hit the target at the earliest time possible?”

Costs and Benefits

Nakaso’s comments come three days after Kuroda underscored his awareness of the side effects of the central bank’s unprecedented monetary policy program. A greater willingness to weigh both the costs and benefits of policy could have a major impact on the comprehensive review being conducted for the BOJ’s next board meeting on Sept. 20-21.

Kuroda said on Monday that the BOJ’s negative interest rate is hitting profits at commercial lenders and lowering the entire yield curve in a way that could harm pension funds, along with household and corporate sentiment. Earlier in the year he’d said the BOJ wasn’t conducting monetary policy for the benefit of commercial banks and would push the key rate further into negative territory if necessary.

It’s still unclear what the BOJ will conclude from the review, while staff members have been asked to frankly report what’s worked and what hasn’t in efforts to achieve the 2 percent inflation target, according to people familiar with the process of discussions.

Japan’s economy isn’t offering much inflationary pressure. Gross domestic product grew an annualized 0.7 percent in the second quarter, slowing from 2.1 percent in the previous three months, according to a Cabinet Office report Thursday.

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