By Daniel Moss
VICTORY in Japan鈥檚 battle with too-low inflation looks as elusive as ever. On Thursday, the Bank of Japan (BOJ) pushed back its estimate of when it鈥檒l hit its 2% inflation target; the goal now won鈥檛 be reached until the year beginning April 2019, according to Governor Haruhiko Kuroda. The delay would seem to confirm that Japan remains subject to a unique 鈥渄eflationary mind-set鈥 that鈥檚 nearly impossible to eradicate.
In fact, what鈥檚 interesting isn鈥檛 how singular Japan鈥檚 problems are, but how common. While they may vary in degree, they鈥檙e increasingly shared by policy makers across the developed world.
With no one predicting a change in interest rates at the conclusion of the BOJ鈥檚 two-day policy meeting, the quarterly forecasts were always going to be what garnered attention. The stickiness of anemic inflation must be especially galling to Kuroda and other officials, given that Japan鈥檚 economic recovery is picking up a little bit of steam.
Japanese consumer prices are now in positive territory — rising 0.4% in May — and gross domestic product has grown for five quarters, the longest uninterrupted spell since the global financial crisis. The unemployment rate, helped by a shrinking population, has hovered around 3% for a year.
Even the BOJ forecasts that kick the 2% inflation target into the long grass expect the current economic expansion to continue for a couple more years. Surely then, the models suggest, wage pressures must kick in meaningfully at some point, especially given how tight the labor market is. And that, in turn, should push inflation back to 2%.
But the models have been wrong to this point — and not just in Japan. In the euro zone, where things are looking better economically than they have in years, the rebound hasn鈥檛 translated into a surge in inflation. While the European Central Bank is likely to reduce its stimulus accordingly in coming months, it will probably do so very gradually.
In the US, where the Federal Reserve has increased interest rates twice this year, a string of inflation misses is similarly giving some policy makers pause over how fast to proceed. Lael Brainard, an influential Fed governor, told an audience at Columbia University last week she wants 鈥渢o assess the inflation process closely before making a determination on further adjustments to the federal funds rate in light of the recent softness.鈥欌 Charles Evans, president of the Chicago Fed, has discussed the need to assure Americans that the Fed isn鈥檛 just a bunch of 鈥渃onservative central bankers who view our inflation target as a ceiling.鈥欌
Few policy makers around the world would claim to have a handle on what鈥檚 happening here. It鈥檚 not a uniquely US or German or Japanese phenomenon. Some Fed officials have mused in recent months about whether changes to cellphone pricing and the cost of prescription drugs help explain inflation鈥檚 retreat since hitting 2% in February. But even if they鈥檙e right, that doesn鈥檛 explain how widespread the problem is globally.
The trend could reflect the lingering after-effects of the global financial crisis. Or perhaps consumers outside Japan have succumbed to what one might call a 鈥渄isinflationary mind-set.鈥 Some people blame cheap imports resulting from expanded global trade, although that鈥檚 been a process underway for decades.
That鈥檚 not to say Japan doesn鈥檛 face some unique challenges. Its rapidly shrinking population, coupled with technological advances that keep retail prices in check, may be too big a hurdle for Kuroda, or any BOJ governor, to overcome. BOJ officials feel let down by labor unions that, they complain, haven鈥檛 been anywhere near aggressive enough in annual wage negotiations with employers — hardly a problem in the West.
Kuroda also does have to contend with a national psychology that can鈥檛 seem to shake the idea of ultra-low inflation or, even worse, the notion of a return to deflation.
At least policy doesn鈥檛 need to be loosened again anytime soon, Kuroda said at Thursday鈥檚 post-meeting press conference. And he may not have to wrestle with this conundrum much longer. His term ends in April, and no BOJ leader has been reappointed since the bank gained independence in the late 1990s. Given how widespread and intractable these challenges are proving to be, he may well find that statistic a relief.
BLOOMBERG
