Photo/Illutration Bank of Japan Governor Kazuo Ueda, center, and other policy board members attend the Monetary Policy Meeting in Tokyo’s Chuo Ward on Oct. 30. (Pool)

The Bank of Japan has determined that the current level of underlying inflation excluding temporary factors, such as government subsidies, is “generally consistent” with the 2-percent goal set by the government and the BOJ.

The goal was finally reached after about 13 years.

That can be said to be a positive development as the economic situation is close to emerging from one in the 1990s and subsequent years in which consumer prices do not rise.

But many Japanese likely may be confounded by the statement that the 2-percent goal has been reached.

Unlike underlying inflation that the central bank emphasizes, actual consumer prices have increased by more than 2 percent from about four years ago due to the surge in energy prices.

The BOJ will now move from pushing up consumer prices to a policy of constraining inflation to about the 2-percent level.

The policy interest rate was left unchanged in October, but rather than taking a reactive stance, the BOJ should increase the interest rate to a neutral one that neither stimulates nor slows the economy.

The 2-percent goal was introduced in January 2013 soon after Prime Minister Shinzo Abe began his second stint in office in a joint statement issued by the government and BOJ.

The large-scale monetary easing policy that started under then BOJ Governor Haruhiko Kuroda extended for 11 years, but that alone was insufficient to raise consumer prices.

The start to a full-fledged increase came in the form of recovery from the COVID-19 health scare and external factors, such as higher energy prices due to the Russian invasion of Ukraine.

As such, consumer prices increased ahead of wage hikes, creating a major burden on household finances.

For the general population to truly feel the significance of achieving the 2-percent goal will require companies to continue with sufficient wage increases so a situation is achieved in which wage increases are greater than consumer price increases.

Companies will also need to attempt to create growth through production of high value-added goods based on a change in awareness that consumer price increases are to be expected.

The joint statement by the government and BOJ called on the central bank to push monetary easing policy to move the economy out of a deflationary condition while the government was to strengthen growth of the Japanese economy and establish a sustainable fiscal structure.

While the price increase goal was reached after 13 years, the potential economic growth rate has fallen to about 0.5 percent and the government’s fiscal condition is the worst among advanced economies, so the government has been slow in its actions.

Prime Minister Sanae Takaichi has formulated a plan for combined public-private investment in excess of 370 trillion yen ($2.3 trillion) and is also pushing a proposal to cut the consumption tax rate for food products to deal with higher consumer prices.

While expanding investments may be necessary to strengthen supply capability, there is also the possibility that consumer prices could rise even further if demand is stimulated through fiscal investment and a tax cut, given the continued manpower shortage.

That would, in turn, increase the burden on household finances.

In her response in the Diet, Takaichi said there was no need for a “reflationary policy” of greater government spending and monetary easing.

Immediate action is needed to convert policy in line with the actual economic situation that has entered an inflationary stage.

--The Asahi Shimbun, Oct. 31

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