Government data showed overall consumer prices rose 2.1 percent year over year in September, marking the first time inflation topped 2 percent this year and raising pressure for further rate hikes. Nearly 14 years after the government and the Bank of Japan set its target, the Bank of Japan concluded that underlying inflation has generally reached its long-sought 2 percent goal.
Government data released showed that overall consumer prices rose 2.1% year over year in September. Inflation excluding volatile fresh food also stood at 2.1%, matching analyst forecasts and marking the highest reading since December last year. The central bank launched a large-scale monetary easing policy in April 2013, dubbed the “Kuroda bazooka” after then Governor Haruhiko Kuroda, aimed at beating chronic deflation and creating a virtuous cycle between wages and prices.
Following a two-day policy gathering, the monetary authority determined that underlying inflation has largely attained the 2 percent objective. This came nearly 14 years after officials and the BOJ initially established the goal in a joint campaign to pull the nation out of its deflationary slump. Observers point out that for the Bank of Japan, hitting its long-pursued 2 percent inflation objective marks not the conclusion of its search for stable prices, but rather the onset of a brand-new chapter in monetary management.
Bank of Japan Measures Inflation Target
Specialists contend that the monetary authority’s recent evaluation demonstrates a change in Japan’s price behavior, propelled largely by worldwide inflation increases instead of the demand expansion the institution sought. The institution should respond if upward price pressures continue to build. Managing monetary policy presents a delicate dilemma for the central bank, which aims to lift interest rates to keep inflation from overshooting while making sure these measures do not damage wage growth and domestic consumption. BOJ data show that Japan’s wholesale prices have stayed around or above 7 percent since May, a trend that could push consumer prices up sharply in the coming months.
The BOJ may have been slow to recognize that underlying inflation had reached, or even exceeded, the target.
Shinichiro Kobayashi, principal economist at Mitsubishi UFJ Research and Consulting
Moving away from its long-running ultra-loose stance intended to drive up prices, the monetary body must now evaluate during every policy session whether additional rate increases are necessary to stop inflation from surging further. Kobayashi added that price increases may have gone beyond the desired pace, warning that the greatest significance of reaching 2 percent is that there is no longer a need to maintain an accommodative monetary environment.
Economists Debate Price Growth Drivers
Experts remain divided over whether monetary policy actually drove the milestone or if external economic shifts deserve the credit. Kobayashi attributes the achievement of 2 percent inflation not only to the easing policy but also to changes in economic conditions following the COVID-19 pandemic. Widespread supply chain snarls, rebounding demand, workforce shortages, and costlier imports have collectively enabled businesses to raise prices more easily, whereas shoppers have grown more tolerant of higher costs thanks to improving paychecks.
Yuichi Kodama, chief economist at Meiji Yasuda Research Institute, offered a more skeptical view of the central bank’s role in realizing the inflation goal.
Taking more than 10 years to achieve the target suggests that monetary policy had little to do with it.
Yuichi Kodama, chief economist at Meiji Yasuda Research Institute
Having promised when launching the Kuroda bazooka that the 2 percent target would be reached within roughly two years, the monetary institution was forced to delay that deadline multiple times. Kodama cited the global inflation surge and the resulting rise in inflation expectations as greater contributing factors. Kodama noted it is the institution’s responsibility to anchor underlying inflation around 2 percent over the longer term.
I don’t think the supply-demand gap is generating much inflationary pressure. It is probably around zero or slightly positive. A bigger factor is that rising commodity prices have pushed up people’s inflation expectations.
Yuichi Kodama, chief economist at Meiji Yasuda Research Institute
Energy Imports and Weak Currency Drive up Costs
Because Japan depends heavily on Middle Eastern energy imports, and because a depressed currency inflates the price of merchandise purchased abroad, both conditions serve to drive up incoming purchasing expenses. The central bank believes higher wage increases in recent years have supported private consumption and led to price increases, but the outlook for demand-pull inflation remains unclear. Household consumption could experience a slowdown as long as turmoil in the Middle East sustains elevated petroleum prices. Household consumption could also experience a slowdown as long as the Japanese currency stays depressed following its tumble to a 40-year trough relative to the American dollar.
At some point, we need to examine whether the 2 percent inflation target is still appropriate for Japan today. With Japan’s population shrinking and demand declining, was it the right goal in the first place?
Shinichiro Kobayashi, principal economist at Mitsubishi UFJ Research and Consulting
How the institution should respond if upward price pressures continue to build remains unknown, and whether inflation can remain at around 2 percent to ensure price stability is not yet clear.