BOJ Achieved 2 Percent Inflation Target

The Bank of Japan declared on October 30th that it hit the target of 2 percent inflation, the main goal of the bank’s monetary policy which had been set in January 2013. Although the bank hoped it to be achieved within two years, it actually took nearly fourteen years, due to its inability to change people’s mind obsessed with deflation. The bank is still aiming at further increase of interest rate as the price inflation imposes upward pressure on Japan’s economy. 

In the monetary policy meeting held on October 29th and 30th, the Bank of Japan approved its Outlook for Economic Activity and Prices. “Underlying CPI inflation is at a level that is generally consistent with the price stability target of 2 percent, and is expected to remain at around that level” says the outlook. The BOJ Governor, Kazuo Ueda, asserted that BOJ’s policy stimulated the economy and a mechanism of mutual rise in wage and price revived. However, the road to 2 percent inflation was not so easy.

 

Former Governor, Haruhiko Koroda, who took the seat two month after the bank set the target of 2 percent inflation, announced that he would control the bank’s policy to achieve 2 percent of inflation within 2 years. He introduced ultra-low interest rate to encourage price inflation, which was called “different-dimensioned monetary easing policy. However, inflation did not reach that target, because companies did not raise wage, causing weakness of consumers’ purchase, and companies hesitated raising price, being afraid of frustrating consumers.

 

The bank applied very unusual policy to achieve the target. It purchased Japanese government bonds to provide with money into the market. It did not hesitate buying large amount of exchange trade funds (ETF). But the consumption was not stimulated so much. Steep decline of oil price in 2013 and 2014 disturbed this policy. Kuroda decided to introduce negative interest rate in 2016.

 

The turning point was not BOJ’s policy but Russia’s aggression to Ukraine in 2022. The war caused sudden rise of energy price and food price. While former Prime Minister Shinzo Abe supported Kuroda’s policy as one of the pillars of Abenomics, it was Fumio Kishida administration that saw BOJ’s declaration to finish ultra-easy monetary policy under the leadership of Ueda in March 2024.

 

The bank closely watched the trend of prices after it ended monetary easing without declaring achievement of 2 percent target. Price hike of oil, depreciation of Japanese yen and demands for development of artificial intelligence still remains as risks of further price inflation. Next target for the bank is how to maintain 2 percent inflation in stable and sustainable way. Ueda insisted in his press conference that the bank would keep its position to seek further interest rate hike.

 

Maintaining its policy interest rate at 1.25 percent, the Bank of Japan decided in the meeting to accelerate its pace of selling ETF. While it maintained the policy to release 330 billion yen of ETF a year, it changed the pace to annual 860 billion yen. While the bank had a plan to sell them for 112 years, the period would be shortened to 43 years. For the bank’s relief, stock market did not immediately respond to the policy change for the ETF.

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