The Bank of Japan has again pushed back the timing for achieving its inflation target.
In the spring of 2013, the central bank declared that the annual inflation rate would rise to 2 percent in two years. But now it is saying that will happen “around fiscal 2018,” which starts in April 2018.
This is the fifth time the BOJ has pushed back the time frame for hitting the target inflation rate.
Even if things go as expected from now, it will have taken the BOJ more than five years to strike the key monetary policy target, meaning Governor Haruhiko Kuroda’s five-year term will end before the achievement.
There have certainly been some unexpected developments in the world in the past three or so years with significant consequences for the Japanese economy, including a steep decline in crude oil prices.
It is also true that, as Kuroda has said, Western central banks have also lowered their inflation projections.
No matter what excuses he may come up with, however, there is no denying that Kuroda’s inflation pledge made three years ago was “exaggerated advertising.”
Unless he accepts the failure with humility and does serious soul searching, the credibility of the central bank will be further diminished.
Even the BOJ’s new prediction that the inflation rate will rise to 2 percent around fiscal 2018 is also much more optimistic than most private-sector forecasts.
Given the BOJ’s track records, we are inclined to doubt whether it is a well-grounded prediction.
The central bank’s aggressive monetary easing has been cast as the first “arrow” of Prime Minister Shinzo Abe’s economic policy, known as “Abenomics.”
Now that the central bank’s monetary expansion program has lost its effectiveness, the Abe administration should make a wholesale reassessment of its economic policy as a whole.
To be fair, the BOJ’s credit easing helped improve corporate earnings by weakening the yen and boosted job and pay growth.
But household spending and corporate capital investment have remained on a weak footing. The administration stresses that the economy is no longer gripped by deflation, but deflationary pressure is not all gone.
Meanwhile, the side effects and potential future costs of the extremely drastic monetary easing are steadily increasing.
The government’s fiscal deficit has been trending downward thanks to growing tax revenue. Due partly to the administration’s decision to postpone the scheduled consumption tax hike for the second time, however, it is unclear whether the fiscal policy target of a primary surplus–meaning government tax receipts exceeding all expenditures other than net interest–in fiscal 2020 will be achieved.
The government’s strategy for renewed economic growth has yet to push up the nation’s potential growth rate–the economy’s ability to grow–although such a strategy is not expected to produce quick results.
The “three arrows” of Abenomics–monetary easing, flexible fiscal policy responses and a package of measures to stoke growth–are in themselves nothing but standard economic policy efforts.
The government should take necessary steps in all these areas and adjust the measures constantly by making unbiased, objective assessments of their effectiveness.
But the administration has only emphasized improvements in the economic conditions and kept promising to “accelerate Abenomics.”
The administration is now talking a lot about raising Japan’s nominal gross domestic product to 600 trillion yen ($5.821 trillion), which can be seen either as a policy target or a pure slogan.
If the government regards it as a simple goal to strive for, no harm will be done if it is not achieved. But the government is using the figure as a basis for its projections concerning fiscal reconstruction and social security policy. That means a failure to hit the target could cause future generations to pay a big price.
It is time for the Abe administration to return to a normal economic policy approach. It involves facing up to reality and crafting workable policy plans through discussions based on realistic projections.