Daily Management Review

The Bank of Japan cannot achieve the inflation target... again


05/02/2018


Management of the Bank of Japan refused its previous promise to achieve the inflation target of 2% "approximately in the fiscal year 2019". In fact, this has become a recognition that prices are weaker in response to the monetary policy of the central bank than it previously thought.



The Central Bank did not change the inflation forecast - it still expects it to be 1.8% annually until March 2020. However, the prospects and implementation of such a forecast (and even more so the achievement of the 2% goal, which was not mentioned now) remain extremely vague. In March, core inflation, excluding more volatile prices for energy and food, was 0.5% in annual terms.

The Bank of Japan also upheld the current parameters of monetary policy and stimulation of the economy. The base interest rate is at the level of -0.1%, and the Central Bank by its interventions will continue to hold the yield of 10-year government bonds around zero and buy assets in the market totaling 80 trillion yen ($ 730 billion) per year.

Rejection of the forecast for achieving the inflation target means that the chairman of the Bank of Japan, Haruhiko Kuroda, who began to work for the second five-year term in office, now focuses on a longer-term perspective in the fight against deflation. Japan have not been able to escape from this trap for the third decade.

After assuming the presidency in 2013, Kuroda launched a cash incentive program, the scale of which increased several times. At first, he promised to bring the price increase to 2% in about two years. However, since then, the Bank of Japan has postponed this period six times. Nevertheless, the promise was repeated all the time in his statements - until the last meeting.

"We do not think that this will have any consequences for the monetary policy in the short term. But we believe that the failure to achieve the target in the financial year 2019 gives the Bank of Japan more flexibility in implementing this policy, eliminating the need for more aggressive incentives," said TD Securities strategist in Singapore. Preserving other parameters of monetary policy means that the current incentive program will continue.

At a press conference after the meeting, Kuroda said: the phrase about achieving the inflation target in the fiscal year 2019 was ruled out to make it clear to market participants that they are wrong, establishing a direct link between the change in terms and the change in monetary policy. "I think there is a high probability that we will achieve inflation of about 2% in the 2019 financial year," he added.

The Bank of Japan retained the inflation forecast of 1.3% in the current fiscal year (completed in March 2019) and 1.8% in the 2019 financial year, excluding the effect of the planned increase in the consumption tax (to increase from 8 to 10% in October 2019). Most economists, however, consider such expectations too optimistic. "The consumer price index continues to show relatively weak dynamics," Kuroda admitted.

Even a revival in the economy cannot yet stimulate inflation. In this fiscal year, the economy is likely to continue to grow at a rate exceeding its potential growth, Kuroda said. The ratio of open vacancies to the number of candidates for work was 1.54, reaching a 44-year high. Unemployment stays at the level of 2.5%. The Bank of Japan hopes that such a situation on the labor market, with a high demand for labor, will ultimately lead to higher wages, consumption and accelerated price increases.

source: ft.com






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