‘BOJ must end obsession with 2% inflation target

Bloomberg

The Bank of Japan should stop being obsessed with its 2 percent inflation target given prices and interest rates around the world remain subdued, says the former currency chief at the Ministry of Finance.
The world’s third-largest economy has recovered enough for the central bank to scale back stimulus policy to give itself some room to maneuver should conditions worsen again, said Hiroshi Watanabe, president of the Institute for International Monetary Affairs in Tokyo. It could start by reducing its annual bond-purchase target later this year, he said.
“Just as an endless intravenous drip becomes ineffective, monetary policy should be changed to reduce stimulus once the economy is no longer facing any headwinds,” Watanabe said.
“This would create a buffer for future needs. There is absolutely no reason to deter such a decision by saying we have to wait for inflation to reach 2 percent.”
The BOJ’s debate about how and when to withdraw stimulus is being mirrored around the world as the major economies struggle to generate inflation even as they recover from the global financial crisis.
The danger of policy makers being too slow to withdraw accommodation would be the creation of another round of bubbles, paving the way for another financial collapse.
While there aren’t serious signs of overheating in Japan as yet, the BOJ will leave its hands tied if it doesn’t become more flexible about its inflation targeting policy, Watanabe said.
Economic growth quickened to 4 percent last quarter and has stayed above 1 percent on an annual basis since the start of 2016. One of the most widely used measures of inflation— core consumer prices excluding fresh food— accelerated to 0.5 percent in July and has stayed above zero for seven straight months, even though it is still only a quarter of the BOJ’s target.
The initial aim of the inflation target was to make sure Japan wouldn’t fall back into a deflationary spiral but the target of 2 percent has become a problem, Watanabe said.
Reducing the level of accommodation after confirming that prices are on an uptrend wouldn’t be a deviation from an overall inflation target, he said.