The Bank of Japan (BOJ) is unlikely to achieve its 2-percent inflation target during Gov. Haruhiko Kuroda's term ending in April 2018, as the "Kuroda style" of policy decisions aimed at defusing the public's deflationary mindset with aggressive targets appears to have hit a snag.
At a board meeting on Nov. 1, the BOJ decided not to further ease its monetary policy, a move that clearly reverses its strategy from waging a short-term battle to fighting a drawn-out battle to attain the 2-percent inflation target. It is evident the public's expectations for the BOJ have taken a drastic step backward.
Asked about his responsibility over difficulties in achieving the 2-percent target during his term, Kuroda dodged the question at a news conference after the policy board meeting, saying, "It is a difficult question as to what is considered to be my responsibility."
Kuroda was picked as BOJ chief in 2013 as a "last resort" to pull Japan's economy out of chronic deflation. In April 2013, immediately after taking the helm of the central bank, Kuroda moved ahead with drastic monetary easing by doubling the money supply to the economy in two years, for example. He had declared that the central bank would "realize the 2-percent inflation goal in about two years." It is extremely rare for a central bank to set a timeframe for achieving an inflation target that can be affected by global economic events. But Gov. Kuroda stated flatly, "We are mobilizing various means and I think we can achieve it."
Nonetheless, the timeframe for achieving the 2-percent inflation goal has been pushed back time and again. Japan's inflation rate rose to 1.5 percent in April 2014, but it began to sputter thereafter. In April 2015 -- two years after launching an ultra-easy money policy -- Kuroda decided to push back the timeframe for achieving the 2-percent inflation target to the first half of fiscal 2016. He has repeatedly pushed back the deadline thereafter, and he himself acknowledged that it would be impossible to achieve the 2-percent inflation goal during his 5-year term. He emphasized at the news conference that it was appropriate to set a specific timeframe for achieving the inflation target in order to boost the public's expectations and stimulate consumption and investment.
"I wonder if we can secure the understanding of people that the economy is to move into a different phase from long-term deflation by simply stating, 'as soon as possible'," he said.
However, Hideo Hayakawa, a former BOJ executive director, warned that it is a "kind of gamble" to try to drastically change the atmosphere by setting lofty goals. Because the BOJ has pushed back the timeframe for achieving the 2-percent inflation goal, it has been forced to maintain its ultra-easy monetary policy for an extended period of time. The BOJ now holds more than one-third of outstanding government bonds. Because of the central bank's massive buying of government bonds, trading in the government bond market has grown sluggish. Izuru Kato, chief economist at Totan Research Co., commented, "The market function of reflecting economic and fiscal conditions has grown drastically weak."
As a result of the BOJ announcing a barrage of "surprises," such as deciding to introduce a negative interest rate policy in January 2016 in a bid to show its strong determination to achieve the inflation target, the market has been thrown into confusion. Each time the BOJ held a policy board meeting, market players expected the central bank to ease its monetary grip further. Ryutaro Kono, chief economist at BNP Paribas, said, "A futile cycle which causes unnecessary changes in the market has been created."
In its comprehensive assessment made at the policy board meeting in September, the BOJ revised its short-term goal of achieving the inflation target. But the central bank presented a new promise to retain its easy monetary policy until the inflation rate stabilizes at 2 percent or higher. The move has made the BOJ's exit from its ultra-easy monetary policy even more remote.
BOJ Gov. Kuroda said at the Nov. 1 news conference that the central bank would do whatever needed to achieve its 2-percent inflation goal. But many market players are skeptical about the BOJ's stance as they are expecting Japan's inflation rate to be in the zero-percent range in fiscal 2017.
"The Bank of Japan will be pressed to revise its inflation outlook downward at its meeting in July next year," said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities Inc.