9.PRICE STABILITY
The adoption of inflation targeting has been a major task for the BOJ. In 2002, the adoption of inflation targeting had already discussed been at the Policy Board’s Monetary Policy Meetings. The minutes of the meetings reveal that although monetary policy proved to be effective in controlling inflation, there is no evidence of its effectiveness at overcoming deflation. Because it could not determine an effective measure for achieving the price target under deflation, the BOJ was cautious about adopting an inflation target.
When the BOJ exited from the QEP, it terminated its commitment. Independent central banks in developed economies are disciplined by the commitment to the inflation target. While the BOJ had explained the concept of price stability previously, the BOJ was required to announce a more concrete idea of price stability as “the understanding of price stability.” It revealed the concrete figure of 1% as the median of desirable inflation rates of all Policy Board members.
Despite the strengthening of monetary easing, there had been no clear sign of rising prices. Thus, a more concrete concept had been adopted. In February 2012, the BOJ announced the “goal” of price stability of 1%. This differed from the previous concept. The goal was chosen as a consensus of the Policy Board. However, the BOJ did not link the goal strongly to the policy operation.
Following a landslide victory in the Lower House election in December 2012, after making comments favoring revision of the Bank of Japan Law, Prime Minister Shinzo Abe pressed the BOJ to adopt a 2% inflation target to show a strong commitment. The goal of 1% inflation had been based on historical evidence that inflation in Japan had been around 1% during the economic boom of the previous three decades and had rarely exceeded 2%. A case in which inflation rose above 2% was considered to reflect rising import prices. This was classified as cost-push inflation, which was undesirable. The BOJ nevertheless adopted the 2% inflation target in January 2013. Although the BOJ assumes that the growth policy of the Abe Government will succeed in raising actual economic growth, 2% inflation is an ambitious target (Figure 9).
As seen from the above, the policy framework for the inflation target has changed from a mechanical application to a flexible one. The BOJ has stated that this change accords with its adoption of the inflation target at this time. Given the recent pressure by the government, however, the explanation is not completely convincing.