“I think I can say we are half way,” he says. “The latest statistics show that the inflation rate has reached 0.9 per cent. But there is still a long way to go.” He says the bank intends to achieve the 2 per cent inflation target and maintain it in a stable manner. “It’s no good just to touch on the 2 per cent and then go down to 1 per cent or less,” he says.
This has led to an upward shift in inflation expectations, which he notes have been “rising steadily but moderately. Many indicators show that expected inflation may be 1-1.5 per cent.”
“We envisage basically three channels through which the quantitative and qualitative easing would affect the economy. The first is the massive amount of purchases of Japanese government bonds, which would suppress long-term interest rates* over the entire yield curve. The second channel is a ‘portfolio rebalancing effect’. Banks, companies and households would shift their portfolios, now dominated by fixed income assets, towards riskier assets, including lending to the economy. The third channel is shifts in expectations.”
The implication, then, is that the MPC should do even more. This leads to discussion of what happens after the second year of the new policy. “Our QQE is not time-constrained,” Mr Kuroda responds. “Our guidance is condition-based. So without any new kind of decision, the current QQE can continue until the 2 per cent inflation target is achieved and maintained in a stable manner.”
“The differences for this fiscal year and next are small.” But in fiscal year 2015, the bank expects to reach 1.9 per cent inflation, while market economists expect the rate to stay around 1 per cent. He suggests that the source of this difference might be that the bank thinks that “as the actual inflation rate rises from negative to 0.5 per cent, 1 per cent, 1.5 per cent, and so forth, inflation expectations will also rise gradually”. Market forecasters may doubt this.
Mr Kuroda is not worried. “Raising the inflation rate as well as the inflation expectations from negative to 2 per cent, that is quite challenging. On the other hand, to stop inflation from rising beyond the 2 per cent target, that is less challenging.”
“Actually, deflation started around 1998,” he responds. “But it has been relatively mild. On average, a 0.5 per cent decline in prices year-on-year. Because prices are declining, people just tend to delay expenditures. So we have a continuous demand shortage and the gap has been filled by continuous fiscal stimulus.
“Second, holding cash became relatively profitable. So corporations accumulated cash. At this stage, they hold nearly 50 per cent of GDP in cash. And they don’t invest much. In the past 10 to 15 years they invested less than their cash flow in physical assets.”
This does not worry Mr Kuroda. “In Japan, in the past 20, 30 years, including the 15-year deflationary period, if you look at wage increases and price increases you find very similar movements. That means that unless wages are rising, prices will not continue to rise, and unless prices are rising, wages will not rise.”
There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so. Higher monetary growth will have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately. A return to the conditions of the late 1980s would rejuvenate Japan and help shore up the rest of Asia.