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The BOJ is too focused on 2%
FOR the Bank of Japan, failure can be an opportunity. Judging from the latest economic forecasts, the central bank is falling even farther behind on meeting its 2 per cent inflation target. Meanwhile, its efforts to keep interest rates down are bringing the bond market to the verge of a coma. So great is the BOJ's buying to support its quantitative easing, traders may just stop showing up to work.
How to get out of this impasse? Officials must be more creative. One suggestion: Stop trying so hard to hit the inflation target.
As long as the 2 per cent goal drives policy, the BOJ must keep muddling through until it's within reach. But the number is elusive: the central bank now thinks it won't happen until 2021. This commits it to years of further stimulus, leaving it with scarce resources to combat any new slowdown - related, say, to the worsening US-China trade spat. There's also mounting concern about the financial strains that years of negative interest rates are placing on regional banks. For a guy who likes to frame things in terms of sustainability, Governor Haruhiko Kuroda looks to be on an unsustainable course.
But what if he introduced some formal flexibility around the inflation target - perhaps a band of plus or minus 0.5 percentage points around the vaunted 2 per cent? Or at least announce that policy can be adapted when milestones on the way to 2 per cent are in sight? Numerical sacraments are becoming passe, so it wouldn't be too terribly radical. Granted, it's tough to change targets if you keep missing them. It can look like failure. But Mr Kuroda is agile and well equipped to manage the trick, especially given that he just started a new five-year term.
The relaxed target would give the BOJ leeway to adjust policy and conserve resources, which will be needed if the economy slows. The ultra-easing wouldn't have to be abandoned per se, but parts of it modified. For example, the yield on the 10-year Japanese government bond could be allowed to move within a wider range than the current 0.2 percentage points from zero. Also, the 80 trillion yen (S$970 billion) of bond purchases pledged each year could be officially cut or abandoned entirely (as a practical reality, the BOJ isn't buying close to 80 trillion now, and clinging to fiction looks unserious). Beyond that, the interest rate of minus 0.1 per cent on reserves held at the BOJ could be normalised.
I am a fan of Mr Kuroda. Under his watch, and that of Prime Minister Shinzo Abe, Japan has made real progress. The policy box they are in constrains how forthrightly they can discuss it. For all the concern about too-low inflation, at least there's no longer deflation. Japan is also on the cusp of a technology boom driven by population decline, 2.3 per cent unemployment, swelling capital spending and a general embrace of robotics.
There's a neat vehicle for Mr Kuroda to modify his approach. At least every couple of years, the BOJ likes to take time out to review where things stand. These periods of reflection have typically been steered by Masayoshi Amamiya, a veteran official with Cardinal Richelieu-like qualities. He got a big promotion this year to deputy governor. He can work a pivot, or even just a few tweaks, for Mr Kuroda again. Perhaps normalising policy in some respects can create room to ease in others, given softening global growth.
Japan doesn't have to be stuck indefinitely. Mr Kuroda is too wily for that. BLOOMBERG