BOJ should make 2% inflation target a long-term goal, panel says

Published Mon, Jan 30, 2023 · 05:12 PM

A panel of academics and business executives on Monday (Jan 30) urged the Bank of Japan (BOJ) to make its 2 per cent inflation target a long-term goal, instead of one that must be met as soon as possible.

The panel’s comments came in light of the rising cost of prolonged monetary easing. They said that the redefining of the price target would need to be made in a new policy accord between the government and the central bank, to replace the one crafted in 2013.

The panel comprised about 100 academics, business executives and labour union officials, including members of key government councils. It pointed out the need for interest rate hikes more in line with economic fundamentals, and to normalise Japan’s bond market function.

Yuri Okina, a panel member considered to be among candidates for the next BOJ deputy governorship, said: “The way the BOJ conducts monetary policy must be revamped.”

“By making 2 per cent inflation a long-term goal, the BOJ can make its monetary policy more flexible,” she added.

With rising raw material costs pushing inflation up well above the central bank’s target, the BOJ’s ultra-loose policy has come under attack by investors, who are betting that it will hike interest rates when Governor Haruhiko Kuroda’s second five-year term ends in April, and those of his two deputies in March.

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Nobuyuki Hirano, former president of MUFG Bank and member of the panel, said the BOJ’s yield control policy had become unsustainable, as it was causing big distortions in the yield curve and making the bond market dysfunctional.

“Given such distortions, we must correct the BOJ’s policy into one that is more flexible,” Hirano said. “It’s too dangerous to keep going this way.”

In parliament on Monday, Kuroda reiterated the importance of maintaining the ultra-loose monetary policy.

“Uncertainty regarding Japan’s economy is extremely high. It’s therefore important now to support the economy, and create an environment where companies can raise wages,” he said.

“Japan has yet to foresee inflation stably and sustainably achieve our 2 per cent inflation target, backed by wage hikes,” Kuroda said. “As such, we must maintain our 2 per cent inflation target and our ultra-loose monetary policy.”

Under strong political pressure to beat deflation, the BOJ signed a policy accord with the government in 2013 and committed to achieving 2 per cent inflation “at the earliest date possible.” With inflation now exceeding that target, critics say the accord has become outdated and is preventing the central bank from phasing out its massive stimulus programme.

Given recent public complaints over rising inflation, Prime Minister Fumio Kishida, who will choose the next BOJ governor, has signalled the possibility of revising the policy under Kuroda’s successor. Kishida had in October 2022 delivered a speech at one of the panel’s meetings, a sign of the influence its proposals have on the government’s economic policy. REUTERS

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