MNI INTERVIEW1: Cutting Inflation Target ‘Wrong’:Ex-BOJ Sekine

The Bank of Japan should resist growing calls from some observers to lower the inflation target from 2% as that would confirm a drop in inflation expectations, a former chief economist at the central bank told MNI.

Noting the arguments that inflation and inflation expectations haven't risen and therefore the BOJ should consider a lower target rate, Toshitaka Sekine, now a professor at the School of International and Public Policy at Hitotsubashi University, said such thinking was "wrong".

If the BOJ lowered its inflation target, it would confirm a drop in inflation expectations, Sekine said.

Globally, 2% is still an international benchmark target for inflation and hence appropriate for the BOJ, he said. If the U.S. Federal Reserve ever lowered their 2% price target, the BOJ will follow suit. But any unilateral action on the bank's part would likely trigger a higher yen, he warned.

Such action would negate all the lessons of the past and go against the BOJ's implicit pact with other central banks to target 2% inflation to help stabilize forex rates, he said.

FISCAL POLICY

However, Sekine accepted that monetary policy alone could not deliver the 2% target in Japan, and it was now clearer that fiscal policy "plays a vital role of boosting the expected inflation rates."

He has no great problem with Japan's increased fiscal spending to deal with the health and economic impact of COVID-19 and downplayed inflationary concerns from the monetary and fiscal stimulus as "unrealistic."

Sekine also voiced concerns over a drop in long-term inflation expectations, noting that former BOJ Governor Masaaki Shirakawa's assertion that inflation expectations don't change easily had been proven despite the QQE under the governorship of Haruhiko Kuroda.

"However, this doesn't mean that the BOJ should do nothing; it should make utmost efforts to increase the expected inflation rate," he said, pointing to Kuroda's success in doing so.

The issue now is how the BOJ can boost expectations further, Sekine said. He accepted there was no clear answer. "The BOJ has no choice but to conduct policy to influence on the expected inflation rate," he said.