After a decade of quantitative and qualitative monetary easing, the Bank of Japan (BOJ) has admitted that it has not achieved its target of reaching an inflation rate of 2%.
In its latest Outlook for Economic Activity and Prices (Outlook Report), the BOJ predicted a 1% inflation rate for fiscal 2023.
BOJ Gov. Haruhiko Kuroda's term will run to April 2023; it means the central bank has effectively given up on reaching 2% during his tenure.
When Kuroda took his post in April 2013, he set a target of increasing Japan's inflation rate to 2% "in around two years," and the country embarked on a policy of a so-called "new phase of easing," injecting large amounts of money into the market.
At first, prices trended upward, but a consumption tax hike in April 2014 and falling crude oil prices stalled the Japanese economy. The BOJ later expanded its easing with the introduction of negative interest rates, but prices continued to dwindle.
The BOJ-set period for achieving 2% inflation has been pushed back six times, and since April 2018 it has not presented any target date at all.
The bank is said to be predicting an inflation rate of 1% for fiscal 2023 due to the effects of lingering economic downturn from the coronavirus pandemic. At the same time, the BOJ has raised its outlook for the economic growth rate in fiscal 2021 and 2022. If prices don't rise even with the recovery in Japan's economy, we can conclude that Kuroda's easing policy has shown its limits. In the United States and other countries in Europe predicting similar increases in growth, prices are recovering.
In a comprehensive policy inspection in 2016, the BOJ concluded in its analysis that it had not been able to achieve the 2% target because public views that prices would probably not rise had become entrenched due to an extended period of deflation.
Kuroda repeated this explanation at a news conference last month. He stressed that even after he leaves office, the BOJ will be able to achieve the target if current easing policy is continued.
Japan has fixated on the target because the central banks of other major countries are aiming for 2% inflation rates. But given the circumstances surrounding the Japanese economy, it is questionable whether such a level is appropriate.
While the advantages of rising prices are uncertain, side effects from major easing policies, such as the loss of healthy function in the market, are accumulating.
It would be irresponsible for Kuroda to hand over the central bank's current policy to a successor while pretending not to notice the impasse Japan has reached. During his term in office, Kuroda should conduct a drastic review of the quantitative and qualitative monetary easing policy.