An elusive 2% inflation target leaves Japan contrarian to recent ECB and Federal Reserve strategies. On October 15th Bank of Japan Governor Haruhiko Kuroda stated that the central bank would continue to pursue its “aggressive” quantitative easing strategy to boost inflation.
Kuroda’s decision is based on recently implemented labor-saving efficiency improvements, which are believed to lead to greater productivity, raising the economy’s productive capacity and thereby boost inflation. For this to hold true, price increases must become widespread, which would lead to inflation expectations for firms and households.
Japan’s struggles to reach inflation continue to dominate economic policy. Despite Japan’s tight job market, slow wage growth is depressing consumer spending, a factor that accounts for more than a half of Japan’s GDP. Under the Abe Administration, the BOJ’s quantitative easing program expanded to unprecedented levels relative to the size of Japan’s economy, serving as one of the three pillars of Japanese economic strategy.
Keith Knutsson of Integrale Advisors commented, “Japan’s struggles with currency inflation, or deflation in many instances, could be representative of the shifting demographics. Current debate over the future developed world facing similar issues with their changing populations is certainly intriguing to investors.”
With the continuation of Abenomics virtually guaranteed by recent election polls, markets anticipate no change to the quantitative easing program before Governor Haruhiko Kuroda’s current term expires in April 2018. It remains unclear whether Japan is going to be able to achieve its inflationary goals whose window has now been pushed back for the sixth time to the 2019 fiscal year.