Japan's 2% Price Goal Is Now Only Symbolic, Ex-BOJ Official Says

(Bloomberg) -- Achieving Japan’s inflation goal is no longer a must for government and Bank of Japan officials, reflecting the failure of six years of massive monetary stimulus.

That’s the view of Kazuo Momma, a former BOJ executive director who was in charge of monetary policy. In an interview with Bloomberg, Momma said the 2 percent goal still had symbolic importance and would not be abandoned. Still, the central bank might try to link its pledge to maintain rock-bottom interest rates to the risk of deflation rather than an inflation figure.

"The understanding that the BOJ’s price goal no longer has the importance of a golden rule has spread widely within the government," said Momma, who left the BOJ in 2016.

Rising Debate

• With side effects and risks to the financial system on the rise, the BOJ has faced growing questions about the wisdom of relentless pursuit of 2 percent inflation. Governor Haruhiko Kuroda says the BOJ is still committed to reaching that goal.
• MORE: Kuroda Defends Price Target After Government Urges Flexibility
• Provided the economy continues growing, hitting the inflation target no longer matters to the government, Momma said. Instead, an improved economy, wage and employment growth are the yardsticks of success for Abenomics, he said.
• Momma noted that Prime Minister Shinzo Abe hasn’t called strongly for the target to be reached recently.

No Change

• The possibility of the BOJ changing the inflation target is extremely low because it would be foolish to signal a retreat from the bank’s easing commitment that could trigger a sharp strengthening of the yen and a steep fall in stocks, Momma said.
• A strong public outcry over the target would be needed to prompt an official change, and currently the calls for a change are limited to a few economists, he said.

Forward Guidance

• Changing the language of its forward guidance is one of the few tools the BOJ has left that could be considered a form of stimulus, Momma said.
• The central bank could pledge to keep rates extremely low as long as there is a threat of falling back into deflation, indicating a commitment for a longer period without linking it to a specific price level, he said.
• NOTE: The BOJ currently says it will keep interest rates extremely low for an extended period while watching uncertainties including a sale tax hike in October.

Rate Cuts

• There is no chance of the BOJ lowering its interest rate on some bank reserves below -0.1 percent since the costs of such a move would be bigger than the benefits, Momma said.
• The initial adoption of the negative rate in January 2016 sparked a rise in the yen, not a fall, and was poorly viewed by banks and the public. Without strong evidence indicating that wouldn’t happen again, the BOJ can’t take that option, he said.

Outlook Report

• In its quarterly outlook report due April 25, the BOJ is likely to forecast 1.6 percent for core inflation in the year starting in April 2021.
• That would be the lowest projection for a new year under Kuroda.
• The BOJ can live with that as long as the forecasts show inflation on a rising trend.

To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net;Masahiro Hidaka in Tokyo at mhidaka@bloomberg.net

To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Paul Jackson, Henry Hoenig

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