Japan begins to fudge inflation expectations

December 22, 2015 1:10 PM (UTC+8)

 

Shinzo Abe just can’t catch a break.

Japan’s prime minister came into office with an ambitious plan, nicknamed Abenomics, to turn around the country’s stagnant economy. In 2013, the Bank of Japan launched a bold quantitative easing program to get consumer inflation up to 2% in around 2 years. By creating such an aggressive price target and timeframe, the Bank of Japan overpromised in a situation with too many uncontrollable variables, essentially setting itself up for failure.

Japanese PM Shinzo Abe
Japanese PM Shinzo Abe

Currently, the monetary and fiscal policy moves meant to shock the country out of its deflationary spiral is being sabotaged by the unexpected global sell-off in commodities

The continued decline in commodity prices and slow consumer spending, have forced the BOJ to push back the target timeframe three times. It now expects to meet this target around the second half of fiscal 2016/17, but most pundits consider even this highly unlikely.

With the falling commodities and consumer prices keeping inflation from rising, Japan’s Economics Minister Akira Amari on Tuesday began to lay the groundwork for the country’s central bank to fudge its own inflation target, said Reuters.

In the $797 billion draft budget for next fiscal year, the government plans to spend $27 billion to stimulate the economy and hopefully help it shift into high gear.

Currently the government wants to increase the sales tax in 2017, but this remains a controversial move, as the last attempt at a sales tax hike in 2014, resulted in a recession.

Amari said unless economy shakes off the spell of deflation, the government wouldn’t be able to raise the tax, giving observers the impression 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, said Reuters.

Early Tuesday the government predicted consumer prices would increase 1.2% in fiscal 2016/17, highlighting the difficulty the BOJ faces.

“If consumer prices were rising more than 1.5% then I don’t think you could complain when talking about the price target,” Amari said, reported Reuters.

“Amari’s comments will have a big impact because this will lessen expectations for quantitative easing,” Norio Miyagawa, senior economist at Mizuho Securities told Reuters. “The message from the government is that the BOJ doesn’t have to try too hard.”

It also shows policymakers are looking for wriggle room as policy options become limited.

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