On Monday, a panel of business executives and academics called on the Bank of Japan (BOJ) to make inflation of 2% its long-term target rather than one that should be accomplished as soon as possible.
These experts put forward this proposal in light of the rising cost that the country has to deal with due to the prolonged ultra-loose monetary policy.
The price target
The panel said that a new policy accord needs to be made between the Japanese central bank and the government for replacing the one that had been made in 2013.
This accord would redefine the price target that has to be achieved. The proposal also dictated that interest rates should be hiked in accordance with economic fundamentals.
In addition, it said that the function of the bond market in Japan should be normalized. One of the panel members said that they need to revamp how the BOJ deals with the monetary policy.
The member said that the country’s monetary policy could become more flexible when 2% inflation would become a long-term goal.
The ultra-loose monetary policy that the Bank of Japan has opted for has received a great deal of criticism of late.
The problems
Investors have become unhappy with the policy because it has pushed up material costs and they are betting that the hike in interest rates will come after the term of the existing BOJ’s governor ends.
Governor Haruhiko Kuroda is currently serving his second five-year term in the position and it will end in April this year, while that of his two deputies would end in March.
Another panel member was also quick to add that the yield control policy adopted by the Bank of Japan (BOJ) has also become quite unreasonable.
This is due to the fact it has resulted in huge distortions in the yield curve and the bond market has become dysfunctional as a result.
Due to these distortions, it has become essential to correct the policy of the BOJ and transform it into a flexible one. Continuing, in the same way, could prove to be dangerous.
The BOJ’s stance
On Monday, Kuroda said in parliament that it is important that they continue with the ultra-loose monetary policy.
He said that there was a great deal of uncertainty about the Japanese economy due to which they needed to support it and create an environment where wages can be increased by companies.
He said that Japan has not been able to achieve its 2% inflation target in a sustainable and stable manner. Therefore, he said that it was necessary to continue with the ultra-loose monetary policy.
In 2013, a policy accord had been signed between the BOJ and the government, as the former had been under strong political pressure for beating deflation.
It had committed to achieving 2% inflation, but the current inflation is beyond the BOJ’s target and critics have said that the accord is now outdated.
It is preventing the Bank of Japan from putting an end to its stimulus program.
