The Business Times

BOJ deputy governor says price uptrend intact, defends 2-yr timeframe

Published Wed, Feb 4, 2015 · 03:25 AM

[SENDAI] Bank of Japan Deputy Governor Kikuo Iwata said on Wednesday the recent collapse in oil prices has not hampered a broad uptrend in consumer prices, stressing that the effect of the bank's monetary stimulus is working its way through the economy.

Iwata, one of the BOJ's two deputy governors and an architect of the bank's radical stimulus programme, said monetary policy cannot immediately fix short-term fluctuations in inflation driven by external factors such as oil price falls. "It takes time for monetary policy to affect prices ... But eventually, it's monetary policy that determines the broad price trend," he told business leaders in Sendai, northeastern Japan.

The BOJ stunned markets by expanding its stimulus in October last year as it attempted to prevent slumping oil prices, and a subsequent slowdown in price growth, from hurting sentiment.

But oil prices have fallen by a further 50 per cent since then, pushing core consumer inflation to a quarter of the BOJ's 2 per cent target and stoking expectations it could ease again.

Iwata said that despite the short-term pressure from oil, there was no change to the BOJ's view that inflation will accelerate in the long run as the economy recovers from the shock of last April's sales tax hike, and starts to feel the benefits of lower fuel costs.

The BOJ must be mindful of the risk that the slowdown in inflation may delay a shift in the public's deflationary mindset, Iwata said. "To forestall such risks ... we expanded our stimulus in October last year." In deploying its "quantitative and qualitative easing" (QQE) in April 2013, the BOJ pledged to hit its inflation target in"about two years." That timeframe has put the BOJ in a bind as tumbling oil prices force it to further qualify its inflation goals, a move that could prove self-defeating by tempering price expectations.

Iwata defended the timeframe, saying that it was based on the experience of other central banks which found it took about 18 months to 24 months to guide prices to roughly meet their targets. "In a country that suffered from 15 years of deflation, it wasn't enough to say the BOJ will hit its inflation target in the medium-term perspective," Iwata said. "It's a more binding commitment than other central banks'."


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