A historic accord that ties the Bank of Japan to a 2% inflation goal is approaching its 10th anniversary amid speculation it may be revised to support a change of direction at the central bank under a new governor.
(Bloomberg) — A historic accord that ties the Bank of Japan to a 2% inflation goal is approaching its 10th anniversary amid speculation it may be revised to support a change of direction at the central bank under a new governor.
The decade milestone comes on Jan. 22 just a couple of days after Friday’s release of figures showing prices rising at twice the pace targeted in the 2013 joint statement with the government.
Yet current Governor Haruhiko Kuroda made clear Wednesday that he remains fully committed to pouring stimulus into the financial system to support the economy and secure sustainable price growth. That’s a stance that puts the BOJ out of sync with all its global peers as they continue efforts to tamp down inflation with tighter policy.
While Kuroda holds firm, the expected nomination of a new BOJ chief by Prime Minister Fumio Kishida in the coming weeks continues to fuel speculation that a change of direction is looming at the central bank. Its stimulus framework has been subjected to waves of attacks by market players as they bet on the BOJ buckling.
Seiji Kihara, a close aide of Kishida, told Bloomberg last month that the government may come up with a new joint statement with the BOJ. That was followed by a local media report that the government is considering revising the agreement.
“The accord is a key factor to predict the path of monetary policy,” said Takashi Shiono, head of Japan economic research at Credit Suisse Group. “The BOJ could manage monetary policy in a more flexible manner as a result of a revision.”
A majority of economists polled by Bloomberg expect the statement to be revised this year.
The most frequent point made by BOJ watchers is that a section committing the central bank to achieve the goal “at the earliest time possible” should be ditched. That would give the bank greater scope to decide on how aggressively it seeks to achieve the target, they argue.
“It’s possible that removing those words would get rid of the feeling of needing to rush toward the goal,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.
Any revisions to the statement are likely to strengthen chatter that extraordinary stimulus measures such as the BOJ’s negative interest rate or its yield curve control framework will be axed, Maruyama said.
Abenomics Symbol
The accord served as an important foundation for the strategy pushed by former Prime Minister Shinzo Abe to reinvigorate the economy by escaping from more than a decade of falling prices.
Kuroda, Abe’s appointee to helm the BOJ in 2013, aimed to reach the target in around two years. That time frame was missed, while the government’s promise to carry out bold regulatory and economic reforms remains largely unfulfilled.
Kishida could choose to revise the accord in a face-saving way for Abenomics supporters in the ruling party by declaring a successful end to deflation, since that was one of the goals of the accord. That would pave the way for either the shelving of the accord or the drafting of a new one.
Taped remarks from the prime minister aired earlier this month indicate that Kishida favors discussing the accord with the new governor rather than amending it beforehand. Kuroda’s term finishes on April 8.
Some of the original drafters of the accord see little need to change it.
Former BOJ Governor Masaaki Shirakawa said he was worried about possible hasty revisions, in an article in a local magazine this week.
Shirakawa, who signed off on the statement with the government before Kuroda took the helm, said careful discussion and a shared understanding of the country’s economic challenges with members of the public are necessary first steps.
Kazuo Momma, a former BOJ executive director who was also involved in putting together the joint statement, said it was difficult to see how it could be improved in a meaningful way.
“If you change ‘as soon as possible’ into a mid-term goal it’s just a meaningless addition that confirms the current situation, given that 10 years have passed by,” Momma said.
“It’s not an issue about the accord, it’s an issue about interpretation of the accord,” Momma said, adding that it already offered sufficient policy-making flexibility.
While the 2% target isn’t realistic for Japan and warrants further discussion, its use across the world likely makes it very difficult for a single central bank to adopt another target, he added.
Despite the latest four-decade high for inflation in Japan, prices excluding fresh food have risen at a much more sedate average pace of 0.7% during the 10 years of the accord, compared with an average of -0.2% in the decade leading up to it.
The economy has averaged growth of 0.6% in real terms with one quarter of the decade remaining, versus 0.7% in the previous 10 years.
The performance of prices and the economy is well below what was hoped for under Abenomics. It has come with a heavy cost too as the bank’s assets swelled far beyond the size of the economy and the government continued to spend, taking advantage of interest rates held down by the BOJ.
Japan’s outstanding debt against the size of its economy has ballooned to 2.6 times from 2.2 times in 2013, according to an estimate by the International Monetary Fund.
With Kishida yet to secure all the funding for his ramped-up defense spending, he probably has little interest in seeing borrowing costs go up.
Still, Takahide Kiuchi, a former BOJ board member who served under Kuroda, sees a high chance that the government will want to revise the statement and signal a shift in the BOJ’s stance.
“The government wants to take the lead on paving the way for more flexible policy under a new governorship,” Kiuchi said. “It will likely be hard for the BOJ to reject that.”
–With assistance from Keiko Ujikane and Kathleen Hays.
(Updates with comparison of growth figures)
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