Kuroda Should Face Up to Zero-Price Growth, Ex-BOJ Official Says

(Bloomberg) -- The Bank of Japan should accept it is making no headway in its efforts to spur 2 percent inflation and start normalizing policy, according to Tokyo University professor Tsutomu Watanabe, a former BOJ official and long-time advocate of the price goal.

"The last five years have confirmed that the policy hasn’t had any effect," on prices, Watanabe said in an interview earlier this month, referring to the central bank’s aggressive easing measures aimed at stoking inflation. "At some point you have to give up."

Watanabe’s comments come amid a recent softening of inflation that has prompted some economists to lower their price projections for the year and fueled speculation that the central bank will also have to lower its forecasts again next month.

Watanabe is known in Japan for his research into consumer price movements and support for a price goal. He first called for the introduction of an inflation target in the late 1990s.

In the last two years he has called for a greater focus on wage gains rather than inflation, given that public support for higher pay is likely to be stronger than support for higher prices.

Digital Currency

He now thinks the central bank should scrap its efforts to stimulate prices through large-scale bond buying and instead introduce a digital currency, enabling it to accept a new price goal of zero percent inflation.

The central bank launched its easing program five years ago, but growth in consumer prices excluding fresh food has recently weakened again. At 0.7 percent in April, core inflation is less than halfway toward the goal, with no acceleration expected by economists when May data is released on Friday.

Goldman Sachs sees a narrower measure of inflation that also excludes energy prices slowing to 0.2 percent in May. On Monday it also revised down its forecasts for the year, citing a loss in momentum in daily price data. Since the start of June, the Nikkei CPINow, a daily price gauge based on point-of-sale data from 1,200 supermarkets nationwide, has dramatically slowed, Goldman Sachs’ Japan chief economist Naohiko Baba wrote in a report.

The BOJ itself released a report this week saying the spread of e-commerce has limited the rise in prices of goods sold by bricks-and-mortar retailers in competition with online sources. The report estimated that in 2017, this factor limited gains in overall prices excluding fresh food and energy by 0.1 percent to 0.2 percentage point.

Banking Profits

While the BOJ’s policy still shows no signs of delivering on inflation it has been weighing on Japan’s banking sector, where profits, especially among regional lenders, have been hit by the long-term low-interest rate environment. There is concern within the BOJ board over the need to consider the stimulus program’s effects on financial institutions.

Watanabe says the BOJ should acknowledge that prices aren’t rising in the way they had hoped and change tack, given deeply held resistance among companies to make their products pricier. According to his research, around half of the 600 items on Japan’s consumer price index aren’t budging at all. Headline inflation in Japan is only being driven by a limited number of items, he said.

A tendency among firms to stem higher costs by making their products smaller rather than increase their price illustrates their deep-seated fear of losing sales and market share through higher prices, he said.

“There would be no reason to continue” the current low-interest rate policy if the price target was lowered to 0 percent from 2 percent, Watanabe said.

Policy Room

One of the issues cornering the BOJ into sticking with its policy is the notion that securing stable 2 percent inflation will somehow give it more policy room in the future to act if the economy gets into trouble again, Watanabe said.

But thinking outside the box and introducing a digital currency would provide the central bank with policy room because it would be able to lower negative interest rates further without causing additional pain to commercial banks.

Kuroda has said that the BOJ is not considering issuing a digital currency at this time.

©2018 Bloomberg L.P.