BoJ raises target despite limited progress
DESPITE sagging public confidence in its ability to encourage growth, Japan’s central bank on Wednesday raised a key economic target and said it would continue to pump money into the economy until it succeeded.
The announcement is likely to add fuel to a debate about the effectiveness and credibility of the Bank of Japan, which has taken an increasingly active role in trying to shake the economy, the world’s third-largest, out of two decades of doldrums. It comes amid broader questions about the ability of central banks around the world – and whether they are running short of tools for re-energising global growth.
The Bank of Japan said on Wednesday that it had set a new target for Japan’s consumer prices, saying it intended to “overshoot” its existing price target of 2 percent price rises, year-over-year.
It did not specify by how much – and it gave little indication of how it would do so. After more than three years of trying to lift prices under its current governor, Haruhiko Kuroda, the bank’s standard measure of inflation stood most recently at minus 0.5 percent.
Falling prices, a relatively new problem in places like Europe, have haunted Japan for two decades. They are associated with weak growth, as wages and corporate revenues slide in tandem with the cost of goods and services. Escaping the trap, known as deflation, has been a central goal for Prime Minister Shinzo Abe, who appointed Kuroda in 2013. Events have not played out as planned.
Kuroda initially promised to beat deflation in two years, a deadline that has come and gone. The bank has tried a number of tactics to lift prices, including reduction of interest rates below zero and buying large quantities of government bonds. Those tactics have poured money into the country’s financial system, making it cheaper to borrow and – in theory, at least – encouraging the sort of spending that leads to higher prices and economic growth.
In January, the BoJ took the unusual step of introducing a negative short-term interest rate, a policy also adopted by central banks in Europe. The idea is to encourage lending to households and businesses by penalising commercial banks that keep cash sitting unused at the central bank. The bank kept its rate steady at minus 0.1 percent on Wednesday.
External shocks, like the plunge in oil prices in 2014, have hampered the bank’s efforts to create inflation. But ultimately, the bank said on Wednesday, a sustained rise in prices has not occurred for one main reason: Japanese people don’t believe it will.
“The price stability target of 2 percent has not been achieved,” the bank said, “largely due to developments in inflation expectations”.
Kuroda has relied heavily on what economists say is the self-fulfilling nature of inflation predictions. If people think prices will rise tomorrow, they are likely to spend and borrow more today and to demand wage increases to offset the predicted rise in the cost of living. By bracing for inflation, they can in effect create it.
The importance of expectations, Kuroda said, was behind the bank’s decision to aim on Wednesday for even faster price rises.
“We are showing an extremely strong commitment,” he said.
Yet the longer the bank goes without succeeding, some specialists say, the more likely people are to ignore its promises.
“Kuroda gambled a nd lost,” sa id Takuji Okubo, an analyst at Japan Macro Advisors.
He pointed to other tweaks to its policies announced Wednesday as evidence that the bank itself recognised it needed to change course.
In one of the changes, the bank said it would seek to exert more direct influence on long-term interest rates, instead of just the short-term rates that central banks normally control. Long-term rates have fallen as a result of the bank’s policies. That is what the bank wanted – lower borrowing costs are good for economic activity – but if anything, they may have fallen too far.
Tokyo led Asian and European equities higher and the yen fell after Japan’s central bank adjusted its stimulus programme, giving world markets a healthy start on what has been dubbed “Big Wednesday”.
The Nikkei sprang from negative territory to end 1.9 percent higher after the Bank of Japan said it would try to raise government bond yields as part of its drive to kickstart inflation. Yields on 10-year government bonds briefly broke into positive territory on the news before falling back.