Why did Governor Kuroda of the Bank of Japan feel “unfortunate”?

Jan 23 18:49

Do you know the inflation rate that the Bank of Japan is aiming for?

Yes, 2%.

Even in the news, it appears in the form of a 2% inflation target.

However, the rate of increase in the consumer price index, which the Bank of Japan refers to, has already exceeded 2%, and the December data announced on the 20th of this month has reached a whopping 4%.

Twice as much as the Bank of Japan's target!

Despite this, Governor Kuroda said, "It is regrettable that we have not been able to sustainably and stably achieve the 2% target."

What is the price increase rate that the Bank of Japan is currently seeing?

Why 2% in the first place?

I investigated the "mystery" surrounding the 2% that seems close but far.

(Economic Department reporter Keiichiro Furuichi)

"I'm sorry" What does that mean?

Governor Kuroda said, "We have not been able to achieve the 2% target in a sustainable and stable manner." It has been above 2% for nine consecutive months since April, and the average for last year and 2022 is also 2.3%.

Why does the BOJ continue to say that the target has not been achieved, even though the target has been achieved numerically?

There are two reasons.

The first is that the current price hike is the result of soaring resource prices and the rapid depreciation of the yen. It's from

In the words of Governor Kuroda, it is not a "sustained and stable" rise in prices.

The other is that it is not accompanied by an increase in wages.

I argue that this is not what the Bank of Japan is aiming for.

In such a situation where wages are not going up but prices are going up, even if people tell you that you've achieved your goal, you're going to want to say, "That's not right."

In March 2014, Governor Kuroda gave a speech titled "Why are we aiming for a '2%' price increase?" It doesn't happen normally," he said.

Since 1971, there have been only two occasions when the rate of inflation has exceeded the rate of wage growth: during the second oil crisis in 1980, and during the surge in international commodity markets in 2007 and 2008. explained.

In an economy and society where the Bank of Japan's target of 2% inflation rate is stably maintained, "a world where both wages and prices rise moderately" will be realized.

That's right.

The Bank of Japan's "2%" is meant to be a goal that should be achieved in the world that the Bank of Japan envisions.

However, as long as the BOJ does not achieve its goal, it cannot be said that the target has been achieved by looking only at the numbers.

This is the background behind Governor Kuroda's remarks of "I feel sorry."

Why 2% in the first place?

It is not possible to judge that the target has been achieved based on numbers alone.

The Bank of Japan has explained that "price stability" is numerically defined as "2%" in terms of the year-on-year change in the consumer price index.

It is said that there are three reasons for this.

The first is the "upward bias," which is a characteristic of the consumer price index.

Statistically speaking, the numbers tend to be higher.

For this reason, it is necessary to set a higher number as a target in advance.

Second, it is necessary to secure a "margin" for flexible interest rate reductions.

Initially, it was thought that securing this "margin" would be an effective means of preventing deflation.

And the third is that "2%" is the global standard.

Internationally, 2% is the balance between room for interest rate cuts and price stability.

Deputy Governor Amamiya said in a policy hearing at the Diet just before taking office, ``The fact that major developed countries have a common target of 2% will stabilize the trend of the exchange rate in the long run. The 2 percent target is an important target for the time being in terms of ensuring price stability, as the market will stabilize and ultimately the foundations of corporate management will also stabilize."

There is a saying that "the trend of the exchange rate will stabilize", but there is a view in the market that if the BOJ lowers its 2% target, the yen will be under pressure and the market will become unstable. I have.

However, although 2% is said to be the global standard, it is said that there is no basis, even at the academic level, as to whether it must be 2%.

There is an opinion that 3% is the "margin" that does not cause deflation, and it seems that the academic world does not know whether 2% or 3% is the correct answer.

In fact, there are multiple types of "consumer price index"

Now that we have entered a phase of rising prices and have surpassed the target of 2%, what is the significance of this figure?

I said that it "exceeds 2%," but the consumer price index that we have seen so far, which reached 4% in December, is considered a representative index. Just one.

In fact, there is also a consumer price index that is different from this.

The consumer price index released by the Ministry of Internal Affairs and Communications has three main indexes.

First, the “National Composite Index”.

Also known as the 'general', it reflects the movement of all 582 surveyed items, including goods and services plus 'imputed rent of owned homes'.

The second is the "comprehensive index excluding fresh food."

Also called "core" (meaning "core"), it is an index that excludes fresh food, which fluctuates greatly in the short term due to factors such as weather, from the "overall" index.

This is the representative index that was explained earlier.

The third is the "comprehensive index, excluding fresh food and energy."

Also called "core core".

In addition to the second “core,” this index excludes items related to “energy.”

Looking at the recent consumer price index data, the "overall" and "core" figures are almost the same.

On the other hand, "core core" is about 1 point lower than "general" and "core".

In the index for December, "general" and "core" accounted for 4%.

"Core core" is 3%.

Looking at the graph showing the transitions of “general”, “core” and “core core”, you can see that from 2021 onwards, the numbers will be different only for “core core”.

By the way, there is another “comprehensive index excluding imputed rent for owner-occupied houses”.

The three main consumer price indices have special calculations for the value of home ownership.

It considers those who live in own homes to be renting their own homes, and the rent that will be paid at that time is included in the index as the housing cost of owner-occupied homes.

The growth of this "imputed rent of owner-occupied homes" has been around 0% recently, but if you look at the "comprehensive index excluding imputed rent of owner-occupied homes" excluding this, December is a whopping 4.8%!

A former Bank of Japan executive said, "I think this index is close to people's 'experience prices'."

What kind of indicator is the Bank of Japan's "2%"?

Then, which of these indicators does the Bank of Japan's "2% target" refer to?

In April 2013, shortly after he took office, Kuroda made the following statement at the House of Representatives Budget Committee meeting.

Governor Kuroda

: In the consumer price index we are talking about, we often look at the base (core) excluding fresh food. is quite low, about two-thirds.However, the core-core index is also important, so we will look at that as well.”

In this way, we can see that the BOJ uses "core" and "core-core" as factors for judging the underlying trend in prices.

In fact, four times a year, the Bank of Japan presents the Policy Board members' outlook for prices in terms of "core" and "core-core" in the "Outlook for Economic Activity and Prices" (Outlook Report).

In addition to this, the Bank of Japan also uses "trimmed averages" that exclude items with large price fluctuations in the upper and lower 10%.

Emphasis on “core core”

Under these circumstances, the BOJ is currently emphasizing the "core-core" index, which excludes not only fresh food but also energy.

April 2022 is the first time that the Bank of Japan has presented a "core-core" outlook in its "Outlook for Economic Activity and Prices."

This was due to the continuing surge in energy prices such as crude oil.

And one of the reasons why the Bank of Japan is paying attention to "core core" is the impact of the large-scale economic measures implemented by the government.

Measures to reduce the burden of electricity and gas charges are expected to push down the inflation rate mainly in the new fiscal year and the first half of fiscal 2023, but as a reaction, they are expected to push up prices in fiscal 2024. I'm here.

For this reason, even within the Bank of Japan, there are voices that it is difficult to capture the underlying trend in prices using the "core" indicator, which includes energy.

A senior BOJ official said, "Economic measures are making it difficult to see prices, but if we look at core-core, we may be able to see the underlying trend. We would like to place even more emphasis on core-core."

According to the outlook for prices announced by the Bank of Japan on January 18, the median value of Policy Board members is 3% for this fiscal year and fiscal 2022.

1.6% in the new fiscal year 2023, and 1.8% in 2024.

“Core Core” is 2.1% this fiscal year.

1.8% in the new fiscal year.

It is set at 1.6% in fiscal 2024.

In this way, the "core core" will exceed 2% this fiscal year, and it will be closer to the BOJ's target in the new fiscal year and beyond.

However, the majority of people inside the BOJ believe that "although signs of positive change are beginning to emerge, there is still a long way to go before the price stability target is achieved."

Governor Kuroda also said at a press conference on the 18th, "I think it will still take some time to achieve the 2% target. I don't think we can see a situation where the price stability target can be achieved in a sustainable and stable manner. No,” he said, and did not change his cautious view.

Is 2% a realistic target?

What the Bank of Japan is aiming for is for companies to raise wages at a high level in the spring labor offensive, which is about to get into full swing, and for this to take root as a sustainable trend.

As a result, the economy will come closer to achieving the price stability target of 2 percent.

To that end, Governor Kuroda has shown a stance of persistently continuing with monetary easing.

However, some former BOJ executives have pointed out that the 2% level, which is difficult to achieve even after 10 years, was not a realistic target in the first place.

In response to this, Mr. Kameda, who served as the head of the Bank of Japan's statistics department until last year (currently executive economist at Sompo Institute Plus), said:

Kameda Seisaku:

“Currently, the figures are above 2%, and if only Japan lowers its 2% target, there is a high possibility that it will be mistakenly perceived as shifting to a monetary tightening stance. There is no real merit in amending it to the point that there is no real merit.The wording in the joint statement with the government that the target of 2% will be achieved 'as soon as possible' will be revised, and it will be clearly stated that it is a medium- to long-term goal. This is nothing more than an endorsement of reality, and it does not mean that the BOJ's policy management will change significantly."

Discuss and verify again

The 2% inflation target also saw lively exchanges at its December meeting when the Bank of Japan revised its policy.

A member of the committee expressed the opinion that ``revisions to the (2%) target would make the target ambiguous and could make the monetary policy response inadequate.'' ), there is room for debate as to how strict the numbers should be treated.”

Governor Kuroda will end his term in April, but what kind of role did the 2% target play in the 10 years of extraordinary easing, where were the limits, and was the 2% target appropriate? I would like to continue to investigate the "2% mystery".

Economics Department Reporter

Keiichiro

Furuichi Joined

in 2014

After working at the Niigata Bureau