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Japan flags inflation target fudge as commodity rout deepens
[TOKYO] Japan's economics minister is laying the groundwork for the country's central bank to fudge its own inflation target as the global sell-off in commodities pushes the consumer price goalposts further away.
Akira Amari's comments come after the government agreed to a US$27 billion stimulus package and a US$797 billion draft budget for next fiscal year that politicians hope will shift economic growth into a higher gear.
Mr Amari also said the government needs to see the economy shake the spell of deflation for it to be able to increase the sales tax in 2017, raising speculation the government is looking for a way to wriggle out of fiscal tightening.
Policymakers have been caught in a trap of their own making with the central bank's self-imposed price target becoming unworkable and the government's commitment to a higher sales tax out of step with efforts to reflate the economy. "If consumer prices were rising more than 1.5 per cent then I don't think you could complain when talking about the price target," Mr Amari said.
Bank of Japan Governor Haruhiko Kuroda launched a bold quantitative easing programme in April 2013 to lift consumer inflation to 2 per cent in around 2 years. The BOJ determined both the price target and the timeframe on its own.
Since then, the BOJ has pushed back the target timeframe three times due to falling oil prices and slow consumer spending. The BOJ now expects to meet this target around the second half of fiscal 2016/2017, but even this seems unlikely.
Earlier on Tuesday the government released economic forecasts showing it expects consumer prices to rise 1.2 per cent in fiscal 2016/2017, highlighting the difficulty the BOJ faces.
Mr Kuroda has recently said the timing of the price target depends on oil prices. Combined with Mr Amari's comments, this shows policymakers are looking for wriggle room as policy options become limited.
"Amari's comments will have a big impact because this will lessen expectations for quantitative easing," said Norio Miyagawa, senior economist at Mizuho Securities. "The message from the government is that the BOJ doesn't have to try too hard."
The BOJ's debt purchases under quantitative easing are harming bond market liquidity, so it may not be able to expand the policy further, some economists say.
The government is scheduled to raise the nationwide sales tax to 10 per cent from 8 per cent in 2017, and some politicians are worried because a sales tax increase in 2014 triggered a recession.
The tax hikes are part of a multi-party agreement to secure more funding for welfare spending, but this clashes with Mr Abe's pledge to boost domestic demand and lift the economy out of deflation.
A stimulus package approved last week could potentially soften the fiscal contraction caused by the sales tax hike.
The package is funded with extra tax revenue, which is seen as good for fiscal discipline because the public debt burden is about twice the size of Japan's US$5 trillion economy.
However, the government regularly bases its budgets on a modest estimate for tax revenue and looks for ways to spend the money that comes in above its estimate.