For BOJ and FOMC - Inflation Is TBD

Despite waning confidence in its ability to spur growth and inflation, the Bank of Japan announced plans last week to raise a key economic target in hopes of putting upward pressure on inflation. Unlike Europe, which has only recently grappled with bouts of deflation, Japan has struggled with low and falling consumer prices for nearly two decades. The BOJ’s standard measure of inflation stood most recently at 0.5 percent. Reversing this trend has been a key focus for Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda. On Wednesday, the BOJ said that it intended to “overshoot” its existing inflation target of 2%, though it didn’t specify by how much, nor did it indicate how it would accomplish this. Mr. Kuroda, who originally vowed to defeat deflation in two years (a deadline that has since passed), has used a number of monetary policy tools to lift prices, including purchasing large amounts of government bonds and reducing interest rates to below zero. This has poured money into the Japanese financial system and made it cheap to borrow, an environment that should encourage spending and lead to higher prices. But the effort has been to no avail, and the very thing the BOJ needs in order to reach its inflation target, consumer confidence, is lacking. By planning to “overshoot” the inflation target, the BOJ is hoping to fuel expectations for rising prices. In theory, if consumers think prices will rise tomorrow, they are likely to spend and borrow more today. 

In the U.S., the Federal Reserve elected to keep its benchmark interest rate unchanged at 0.5%, while acknowledging an improved economy. Although the FOMC’s September meeting was largely uneventful, three members of the policy-making committee did dissent, indicating that there is some concern that the Fed is waiting too long to resume policy normalization. Like Japan, sluggish inflation has been the Fed’s Achilles heel, and is one of the key reasons the Fed remains on hold. While Chairwoman Yellen has made it clear that the FOMC does not consider politics in policy-making decisions, it is widely expected to defer any additional rate hikes until after the presidential election. This would delay any action until the final meeting of the year in December.

 Source: NY Times, Bloomberg