Has anybody else spotted that the Bank of Japan “price stability” target is anything but?

22nd January 2013 by Shaun Richards

This morning has seen something which I have been waiting for with anticipation. I have written both here and on Q Finance about the threats that the new Japanese Prime Minister has been making to his country’s central bank the Bank of Japan. His economics plan or Abenomics needs support from monetary policy andso he has threatened to rewrite the Bank of Japan Act and demanded that a 2% inflation target replace the current 1% one. His pressure is reinforced by the fact that the term of the current Governor Shirakawa ends in April so that he will be able to appoint a new one. Oh how he must regret that the pliable Governor of the Bank of England Mervyn King is not available until June! After all it is the current fashion to transfer or poach central bank governors is it not? We are after all in the English transfer window.

Something you may not be expecting

The reputation of the Bank of Japan internationally is often one of a central bank which lacks independence. Actually in the credit crunch era it has been one of the more independent central banks as it has often resisted the pressure applied on it by the Japanese government. A feature of Japanese economic life has been the squabbling between the two. A precis of it is that the Japanese government -of whatever ilk- blames the Bank of Japan for its economic ills and it hints at it being the government’s fault. So far as Kipling put it.

And Ne’er the twain shall meet

So what happened today?

We had the announcement of three actions by the Bank of Japan.

Specifically, the Bank decided to (1) introduce the “price stability target,” and (2) introduce the “open-ended asset purchasing method” (i.e., to purchase assets without setting any termination date) under the Asset Purchase Program. Furthermore, the Bank decided to release the joint statement with the Government.

So we immediately wonder if the joint statement is the equivalent of the apochryphal civil servant Sir Humphrey Appleby’s “strongly worded letter”? In general it is although if the bit below actually happens it will be a clear change as explained above and the emphasis is mine.

the Government and the Bank of Japan will strengthen their policy coordination and work together as follows

The Price Stability Target

It looks at first as though Abenomics has a clear victory here.

Based on this recognition, the Bank sets the price stability target at 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI).

However you may note that the “price stability target” is anything but! It can go straight into my financial lexicon as whatever the faults of the Japanese economy a lack of price stability is not one of them. The Consumer Price Index rebased at 100 in 2010 is at 99.2 which in fact is one of the most stable inflation measures you will find. Perhaps they meant to add the letters i and n to the word stability!

Indeed if you note the sentence which preceded this there is another problem.

The Bank recognizes that the inflation rate consistent with price stability on a sustainable basis will rise as efforts by a wide range of entities toward strengthening competitiveness and growth potential of Japan’s economy make progress

Yes raising prices will apparently be part of “strengthening competitiveness!”. At this rate my financial lexicon is filling up rather fast.

How will this be achieved?

Open ended asset purchases

We quickly note that here the plans for Abenomics have had something of a reversal.

The Bank will pursue aggressive monetary easing, aiming to achieve the above-mentioned price stability target

You see we were being told that policy was “aggressive” anyway! So where’s the change?

from January 2014, the Bank will introduce a method of purchasing a certain amount of financial assets every month without setting any termination date.

Oh so not now then? And as Prime Minister Abe scowls at the delay we see that the Bank of Japan has provided itself with a ready made excuse.

Taking into consideration that it will take considerable time before the effects of monetary policy permeate the economy…..

So any effect will not be felt until 2015 at the earliest and maybe 2016 which starts to feel like the can is being kicked down the road.

And whilst the mainstream media is talking of the Bank of Japan doing its version of “Pump up the volume” by mentioning 13 trillion Yen a month there is a catch.

As a result of these measures, the total size of the Asset Purchase Program will be increased by about 10 trillion yen in 2014

Is 10 trillion the new 156 trillion then?

What we are seeing is the difference between gross purchases (156 trillion Yen) and the net purchases of 10 trillion Yen. Or to put it another way the new application of stimulus is relatively limited. Did anybody actually think that in 2014 the existing stimulus stock would have been allowed to mature and expire?

Looked at like that the QE to infinity statement below just looks like a continuation of the current policy which lest we forget has failed to even hit the 1% inflation target.

is expected to be maintained thereafter.

The Bank of Japan strikes back

At the bottom of the statement we see this.

The Bank expects that the Government will surely implement measures, specified in the “Joint Statement,” such as carrying out bold regulatory and institutional reforms, and furthermore, steadily promote measures aimed at establishing a sustainable fiscal structure.

As Prime Minister Abe is moving in the opposite direction to “a sustainable fiscal structure” with his expansionary plans he will not welcome this. Also his first period as Prime Minister gave Japan pork barrel politics rather than reform!

Is the Bank of Japan trying to endgame the government?

If you look at the inflation forecast for 2014 then Prime Minister Abe’s eyes will light up. The Bank of Japan forecast is for its favourite inflation measure in Japan to be between 2.4% and 3%. However there is a catch-22 type situation here.

The scheduled consumption tax hikes for 2014 and 2015 — of 8 percent and 10 percent, respectively — are incorporated in the forecasts.

Abenomics is not likely to be very keen on tax rises and accordingly its proponent has deferred any decision on this or kicked the can to August. But for a man who wants a 2% inflation target look at the carrot held out.

The domestic CGPI will be pushed up by 2.9 percentage points and the CPI by 2.0 percentage points. (assuming it is fully passed on).

Just to ram the point home the Bank of Japan forecast for inflation in 2014 without the tax rise is centred on 1.1% or below the 2% target.


So as you can see from the above it looks as though the Bank of Japan continues to resist the Japanese government. It can offer a 2% inflation target  because it feels that fiscal sustainability requires the sales tax increases recommended by the International Monetary Fund and they are likely to hit the target for it on their own. Also even inspite of this elephant trap there were dissenters.

Mr. T. Sato and Mr. T. Kiuchi dissented from setting the price stability target at 2 percent in terms of the year-on-year rate of change in the CPI.

Also Mr.Miyao proposed an alternative motion so there are three possible dissenters which in Japanese culture is not far off a revolution.

Also as a final thought I leave you with this triumph of mathematics and statistics from the Bank of Japan.

the inflation rate consistent with price stability on a sustainable basis will rise

Perhaps that is why the explanatory note keeps repeating itself (hoping by repetition it will be believed) and takes 3 pages to explain what is actually a simple concept. Or perhaps they all retired to the next room for a good laugh!

19 thoughts on “Has anybody else spotted that the Bank of Japan “price stability” target is anything but?”

  1. James says:

    Hi Shaun,
    Although the cultural aspects are different, this seems the same old story:
    1. Do something which no-one understands and which does not involve tax rises or cuts in spending
    2. Talk about bold reform (but do nothing)
    3. Use the central bank to kick the can down the road
    4. Leave the next generation to sort it out
    5. Never ever ever talk about how it is all going to be reversed/sorted out in future

    1. forbin says:

      yup thats about it for “action” these days
      because nothing can be done !

      not without hurting people that count …… give you three guesses who they are – it’s not the likes of you and me.


      Ps: so sit back and eat the popcorn – I think we have a front seat :-)

    2. Anonymous says:

      Hi James
      A Japanese financial lexicon would involve the words “bold” and “aggressive” which are used regularly but if they actually wereused with their conventional dictionary meaning would have had a different impact by now!

  2. forbin says:

    Hello Shaun,

    So lets to Japan for our future ?

    today we have UK borrowing up
    suicides are up too – are we making a link here ? oh deary me…..

    And tomorrow we get the great work of fiction called GDP figures

    All hints are that we’re in a recession again – did we ever leave ? the bound of error on the headline stats is never mentioned

    So we continue to borrow more and earn less. No signs of growth here then


    1. Drf says:

      But the real point is forbin, what level of confidence can you any longer place in any of these official numbers? Those which are embarrassingly high are cunningly manipulated downwards; those which are embarrassingly low are cunningly manipulated upwards. With no independent real data there is no way of really understanding the true position, and that of course is their objective. Confidence tricksters have always had the same methodology: Find the Lady (if you can see through the conjuring and manipulation). It never fails, because most people are so stupid.

      If you look back you can see a whole series of confidence tricks used at various times in history; my grandfather who was a grocer told me of some of them. The old brush trick is a typical one. Nothing really changes. People never learn and in reality remain to be stupid for the most part; they continue to be vulnerable because for the most part they are completely stupid when befuddled with any sort of situation which is not as straightforward as it seems at first glance. (This is why so much so called “small print” is used today to befuddle consumers, in direct contravention of the Unfair Terms in Consumer Contracts legislation, for example.)

      1. forbin says:

        hmm, brought to mind George Carlin

        Tries to qoute….. ” you know how stupid the average person is? well remember , half of them are worse than that! ”

        I think there is also a theory of stupidity of crowds and groups- each individual when questioned alone can seem quite bright – but once in a group or even a crowd then the average IQ of that group is inverse to the size of that group

        The cabinet has 10 members ergo they are 1/10 th as bright ….

        as for confidence tricks I think our issue is that nobody is pointing out the glaring inconsistances seen!

        BoE is , what , 37 times now over its inflation target – and no one in main stream is taking a blind bit of notice!! as example

        I gave up worrying about it – we have a front seat at the stalls – just get your popcorn whilst you can 😉


      2. Anonymous says:

        Hi Drf
        Enlighten me and presumably quite a few others please. What is the brush test?

        1. Alex says:

          The Brush Trick, or Brush Test as it should be called, is the final entrance exam required to run a Central bank…


          1. forbin says:

            and if you fail it you get in……

        2. Drf says:

          Hi Shaun, It was called “the old brush trick”, not test. In older retail shops a scrubbing-type brush was left at one side of the counter. The store keeper or sales assistant then routinely made a fictitious charge on all customers’ bills; if anyone returned and queried the excess charge the store owner pointed to the brush and claimed that the complainant had forgotten to take it with them when they had taken their shopping. The customer would then retort of course that they had not purchased any brush, and the storekeeper would then refund the excess charge to the customer to appear to be honest. In that manner it was used as a continuous and sequential means of making free money, because most customers did not come back to complain.

          This trick was included in at least one episode of Ronnie Barker’s TV series “Open all hours”.

  3. Anonymous says:

    Is it true that newly retired Japanese are now reducing their savings and thereby reversing the savings culture ?

    1. Anonymous says:

      The data is invariably behind the times but a paper published in November 2012 by Governor Shirakawa gives us a hint of this.

      “We do not have empirical studies based on Japanese micro-data enough to answer the following questions, such as, all else being equal, whether the elderly prefer stocks or whether they tend to sell their
      stocks and buy into the bond market for safer assets. Looking ahead, further studies on that area are much awaited.”
      Translating: The Bank of Japan is worried about this…

  4. Midge says:

    Hi Shaun It seems that you are going to be correct on another issue as Mervyn King has said in Belfast that BOE is prepared for more stimulus if needed.He said monetary policy is not a ” panacea” -well.I note the value of GBP is falling again.Shouldn’t this be the UKP?

    1. Anonymous says:

      Hi Midge
      Yes I have put out a few views on this on twitter. Mervyn King has been as contradictory as ever as in one part he says that inflation targeting is important and in another he confesses to ignoring it for growth, except of course we have had little or no growth!

  5. Not that it will lkely help them out of their current troubles, but Japan should fix its target inflation indicator. Instead of using a rental equivalence approach to measuring owner-occupied housing they should use a net acquisitions approach. If they had been doing so in the 1980s credit would not have been so easy and they would not have had such a terrible real estate bubble.

    Unfortunately, if they want to do this they will have to develop the housing price indexes that they need to calculate it, much like a lot of European Union countries are doing as I write this. It is my understanding that Japan does not have any good housing price index at present, in spite of it being a much larger economy than the UK, with generally good price statistics.

  6. Noo 2 Economics says:

    Looks like BOJ – 1 Abe – 0. Awaiting future developments with glee – please pass the popcorn Forbin only I can’t afford to buy any because it went up by 3.1% and my pay only went up 1.8% .

  7. Bill says:

    I think that Mr King must be (half) listening to what you’ve been saying but he’#s one jump ahaead! Namely that the position of the Gov. Bank of England should be an elected office. Which means that we get a politician there.

    Certainly the staements recently have been full of spin and ‘Yes Minister’ statements such that it needs and detailed analysis just to tease out what he is really getting at. Your daily column is excellent in doing this, but it’s a great pity that the papers and TV channels seem to take it at face value!

    Perhaps he is saying one thing and doing another? It certainly seems so – and the politicians probably feel that doing this is a Good Thing rather than something they lose sleep over…

  8. HarryA says:

    Hi Shaun,

    Thanks for this. Apologies for the ignorance, but just to clarify. The Y156trn purchase proposal for 2014 is simply a roll and re-purchase of historic QE purchases, to the extent that only Y10trn is new money?

    Has any “new” purchase been proposed for 2013, or is this financial year 2014 (beggining in a few months)?


    1. Anonymous says:

      Hi Harry

      Yes there is in fact much less “new” QE in 2014 than you might assume from the headlines. In fact it will represent a slowdown on 2013 where the Bank of Japan expects to increase its net QE holdings by 20 trillion Yen by June and a further 16 trillion Yen by December 2013.

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