April 28, 2016, 20:00 JST

The man needs a start over

In the press conference after the policy announcement, BoJ governor Kuroda faced a few tough questions. In our view, the toughest question came at the very beginning. The reporter asked “Governor Kuroda, you recently stated in the parliament that Helicopter Money Policy has not crossed your mind at all. However, you have similarly dismissed the Negative Interest Rate Policy only days before adopting the policy. Is there any fundamental differences in your statements?”. Mr Kuroda started to laugh at the question before giving his answers in which he said that fiscal policy and monetary policy are separated by law. Later, he was asked about what he thought of the perception gap between the market and the BoJ and he answered that the BoJ has no communication problem.

While we understand that openly admitting mistakes may not be wise for central bankers, appearing to be out of touch with the reality hurts the effectiveness of the monetary policy. At the beginning of Abenomics, declaring one’s confidence in reaching 2% inflation target in 2 years seems ambitious and brave, but after postponing its deadline for four times, “projecting” inflation to reach 2% by the end of fiscal year 2017 seems more like a wishful thinking, if not a charade. It is even doubtful if Mr Kuroda himself believes in such projection.

In our view, the BoJ has three choices. One is to keep the current charade where the BoJ maintains its target, 2% inflation in 2 years, while not pursuing it in earnest. The second is to change the target, perhaps by abandoning the timing part of the target. The third is to stick to the target and taking measures, however drastic, to achieve it.

In our view, the second option seems wise and moreover, the BoJ has already adopted it, in secret, as we wrote in a short comment we published last September "BoJ no longer bound by time limits". Pursuing to achieve 2% inflation target in the medium term, while balancing the goal with other objectives such as financial stability, is entirely reasonable. Setting a target of 2% inflation in 2 years had some merits initially, and the BoJ could have achieved it if not for the unwise decision to raise the consumption tax rate in 2014. However, now that the global economic cycle is peaking off and the monetary policy ammunition is running low, the target of 2% inflation in 2 years is almost implausible.    

While Govenor Kuroda does not seem to understand it, maintaining transparency has become an important element in monetary policy in the last two decades. Maintaining a target framework the governor himself probably does not believe in is pointless. Creating a market volatilty as happened today has no benefits to the economy and only undermines the effectiveness of the monetary policy. Mr Kuroda should swallow his pride, admit the change in the target framework and start over.