April 30, 2015, 19:30 JST

Kuroda emphatically reaffirms the 2% inflation target

The BoJ governor Kuroda was mostly evasive in answering questions from the press after the policy announcement on April 30. He declined to comment neither on exchange rates, stock market nor on AIIB. When asked about the timing and conditions of an exit from the quantitative easing, he gave no clues. He maintained that the inflationary pressure in the economy is gradually rising, although such statement flies in the face of recent development in the consumer price inflation.


He was crystal clear on one point though. When asked if there are any negative side effects in maintaining the 2% inflation target, he emphatically reaffirmed the appropriateness of the 2% inflation target. He said that the 2% inflation target is the fundamental origin of the current BoJ policy, guiding upward the inflation expectation in the economy. There has been some speculation that the BoJ may consider lowering its inflation target of 2% to 1%, but the answer from Governor Kuroda should put the speculation to rest. His comment on fiscal policy was also noteworthy. When asked about Japan’s fiscal policy, his answer implied that he is not happy with the progress made in fiscal consolidation and growth policies. He explicitly put some pressure on the Japanese government by commenting on Prime Minister Abe’s promise to announce by this summer a road map to balance the budget by 2020. 

Aside from Governor Kuroda’s utterance in the press conference, there were a few noteworthy developments in the BoJ’s policy stance on April 30. Until today, the BoJ had maintained that it aimed to achieve its inflation target around fiscal year 2015, but the timing is now delayed until the first half of fiscal year 2016. The postponement is quite appropriate, in our view. Trying to achieve the 2% inflation target in the year oil price has halved would force the central bank to take measures that may be too inflationary. The effects from declines in commodity prices are transitory in Japan and its monetary policy should disregard the effect from the large swing in commodity prices.


At the same time, the BoJ cannot be too patient in achieving its inflation target though. As the government plans to raise the consumption tax rate again in 2017, it would be advisable to meet the inflation target before the fiscal tightening takes place. The BoJ announced that it forecast the growth in Japan to weaken to 0.2% in FY2017, mostly due to the scheduled sales tax hike in April 2017.    


There is also a time limit to how long the BoJ could continue its quantitative easing. The BoJ’s market share in the government bond (JGBs) market has risen from 10% to 27% in the last 2 years. At the current rate, the BoJ will own 50% of the JGB market by the end of 2018.


While there is no theoretical limit to how high the market share the BoJ could reach in the JGB market, 50% seems like the very edge where central bank could justify its bond purchase operation as a monetary policy. All in all, a failure to achieve its inflation target in 2016 would expose the BoJ and Japan to a situation where its public finance is beyond repair and its monetary policy has failed to reflate the economy.