I’ll admit it: I never saw the movie Jerry Maguire. After seeing all the commercials and excerpts, I felt like I saw it without having to pay for a ticket. One of the more memorable scenes is when Cuba Gooding Jr.’s character yells into the phone, “Show me the money!”
With its recent announcement, the Bank of Japan (BOJ), I think, has failed to show investors the money. It said it would shift from a 1% inflation “goal” to a 2% inflation “price stability target,” but there was little in its statement to inspire confidence that it will actually hit its new inflation target. Additionally, in 2014, it plans to implement an “open-ended asset purchasing method” under its Asset Purchase Program. In the wake of the policy announcement, the yen strengthened relative to the dollar.
First, I think the entrenched fears against hyperinflation were evident in the BOJ’s shift from an inflation “goal” to a “price stability target.” A target is a weaker commitment than a goal. It’s tough for me to figure out how a 2% inflation rate is consistent with “price stability.” This is similar to my complaint about the Federal Reserve’s policy of targeting inflation when its legislative mandate is “price stability.” Price stability implies that the price level is stable (i.e., no inflation), not that the inflation rate is always positive. The BOJ’s choice of language may be a sop to those who fear that the BOJ will simply monetize all the government’s debt creating rapid inflation. Or, it may reflect an institutional unwillingness to create inflation.
Second, deferring an expansion of its Asset Purchase Program to 2014 underscores the BOJ’s lack of commitment to this target. That can change, though, as the BOJ governor’s term expires April 8 and his two deputies’ terms expire March 19. Shinzo Abe, the new prime minister of Japan, will likely replace these three with officials that will be more committed to weakening the yen and creating inflation.
A 2% rate of inflation wouldn’t be all that bad for Japan, but the country needs more than inflation. The recently announced infrastructure investment project by Prime Minister Abe was a little weak in terms of trying to transform Japan’s economy into a more dynamic and growth-oriented place. If inflation is all they’ve got, they don’t have much. The new policies could help the large export-oriented firms in Japan, but they could also create a tough environment for investors in Japanese bonds and smaller Japanese businesses that cater to domestic consumers.