Japan’s been without inflation for oh, 10 years now. So why start?
The Democratic Party of Japan’s (DPJ) manifesto, released on Thursday, was full of pledges to reduce the state debt — but no mention on that rumoured western-style 2 per cent inflation target. A DPJ panel had advocated such a target, to boost the country out of its decade-long deflation.
The Bank of Japan (BoJ) remained, as ever, opposed.
An inflation target is just about the only thing Japan has yet to try as part of its deflation-fighting toolkit. However, there has been plenty of concern that such a move, perhaps coupled with the unusual step of having the BoJ also underwrite Japanese government bonds, would create mass inflation.
Anyway, on Thursday we got an outline of the DPJ’s plans for deflation.
Barclays Capital’s FX team summarises below (the manifesto is only available in Japanese):
On monetary policy, the DPJ only came up with the fight against deflation in cooperation with the BoJ, and a long-term growth target of nominal 3.0% and real 2.0%, implying inflation at 1%. This is in line with the BoJ’s current “understanding” of price stability between 0-2% (midpoint 1%), but falls short of the above-2% targeting advocated by a DPJ panel and the 1.5% targeting mentioned by the LDP. The DPJ government also expressed its intention to turn CPI positive during FY2011 in the new growth strategy released today, but this is in line with the BoJ’s forecast in its Outlook Report (+0.1% for FY2010) as well and is not an aggressive target.
Perhaps the DPJ, as Nomura’s Richard Koo suggested, has just learned that the money multiplier is well and truly broken. None of the BoJ’s existing monetary policy tools will fix the system, even with an inflation target to aim for..
The words dead in the liquidity (as in trap), spring to mind.
Related links:
Is BoJ-bashing about to inflate the world? – FT Alphaville
Noda resists inflation target for BoJ – FT