Bank of Japan sets 2% inflation target

Tuesday 22 January 2013 12.17
Bank of Japan planning more aggressive action for economy
Bank of Japan planning more aggressive action for economy

Bowing to government pressure, Japan's central bank today pledged more aggressive action to boost the world's third-largest economy, including setting a 2% inflation target.

The Bank of Japan also said it would conduct "open-ended" asset purchases to help achieve the goal of breaking out of a long spell of deflation. 

These purchases are similar to the monetary easing strategy being followed by the US Federal Reserve.

Prime Minister Shinzo Abe had repeatedly urged the central bank to ease monetary policy further to help the recession-struck economy escape from years of falling prices.

Whether the effort will succeed remains to be seen: the central bank has not achieved even its 1% inflation target, with price increases hovering below 0.5% for the past two years despite surges in energy costs.

Under the asset purchases plan, the Bank of Japan will buy about 13 trillion yen ($145 billion) in assets every month from January 2014 including Japanese government bonds and treasury bills. Its current asset purchase scheme will continue until the new plan comes into effect.

Japan's government has promised reforms to improve the competitiveness and "growth potential" of the economy, such as investing more in research and development and adjusting tax policies.

Abe's government is seeking to spur growth both through heavy government spending on public works and other projects and through monetary easing. The announcement by the central bank today was in line with expectations.

With an election for the upper house of Japan's parliament due in July, Abe needs fast results. Financial markets have rewarded his campaign pledges with a rally in the benchmark Nikkei 225 stock index, which has gained nearly 22% in the past year, mostly in the past few months.

And the Japanese yen has weakened against other major currencies, relieving pressure on exporters whose competitiveness was squeezed by a prolonged bout of "endaka," or strong yen, in the past few years.

In an apparent acknowledgement of concerns over Japan's soaring public debt, which is more than twice its gross domestic product, the joint statement said the government would seek to "establish a sustainable fiscal structure ... to ensure the credibility of fiscal management."

The Bank of Japan also said it would also monitor conditions for "any significant risk to the sustainability of economic growth, including from the accumulation of financial imbalances."

It described its inflation goal as a "price stability target." "Under the price stability target, the bank will pursue monetary easing and aim to achieve this target at the earliest possible time," it said.

At present, consumer prices are basically flat, the central bank said. Although the economy remains "relatively weak," the central bank said, public spending and housing investment appear to be picking up, and recoveries in overseas markets will also help stimulate demand.

The Abe government is expected to nominate as Bank of Japan governor an expert known to favour its policies when the term of the current governor, Masaaki Shirakawa, ends this spring.

The Bank of Japan's "open-ended" easing would be similar to that of the US Federal Reserve, increasing purchases of government bonds and other low-risk financial assets without setting a deadline.

Critics of the government's strategy of pushing for more inflation argue that it will do little to stimulate real demand in the economy if it pushes up prices without accompanying gains in purchasing power. They also express concern that the government's campaign to influence monetary policy might undermine the Bank of Japan's independent status.