Suga to Help Bank of Japan Tiptoe Away From Inflation at Any Cost

The arrival of Prime Minister Yoshihide Suga is set to allow the central bank to take an even longer-term view on achieving a price goal, which was once seen as a quick two-year mission.

By refraining from additional easing even with prices flatlining again, the BOJ showed again at Thursday’s policy meeting that inflation no longer monopolizes its attention as it tries to keep companies afloat and get the economy back on its feet.

The BOJ’s stand-pat decision came within hours of the Federal Reserve fleshing out of its ramped-up commitment to inflation and jobs. But any change in the status quo in Japan following Suga’s rise to the premiership will probably favor less emphasis on reaching 2% price growth.

Economists say if the BOJ is prodded to take further action by the Suga administration, it’s more likely to be in support of jobs, the economy or to stop the yen strengthening rather than pushing up prices.

“Suga doesn’t place a heavy emphasis on the price target,” said Shigeto Nagai, head of Japan economic research at Oxford Economics and a former chief of the BOJ’s international department. “As long as the economy recovers and markets are stable, the BOJ is essentially off the hook on inflation.”

Any playing down of the importance of the price target is likely to be welcome news for a central bank that currently has no inflation to show for its massive easing program of more than seven years and few additional tools to employ.

After amassing a pile of assets worth more than the economy, the central bank’s main gauge of inflation is back at zero. Data out Friday is expected to show it turning negative again, partly because of a domestic travel campaign Suga himself spearheaded. Hotel prices lowered by the government to support virus-hit tourism could shave an additional 0.3 percentage point off inflation, according to a Bloomberg calculation.

And things are likely to get worse before they get better. Economists surveyed by Bloomberg expect prices to fall by an average of 0.6% over the last three months of the year after the index loses the upward support of a tax hike a year ago.

BOJ Governor Haruhiko Kuroda said after Thursday’s decision that there had been absolutely no change in the bank’s commitment to achieving 2% inflation, but he did open the door to more policy action if other indicators showed problems for generating a positive economic cycle.

“While price stability is of course our first priority, it’s only natural that we also aim to ensure a healthy economy including the state of employment,” Kuroda said.

The new premier’s apparent indifference to achieving 2% inflation could further accelerate a shift in the role of the BOJ to more of a troubleshooter for the economy than a game changer, with more onus on the government to spend if needed, helped by low interest rates held down by the bank.

Suga has barely mentioned the importance of the price goal since his name first emerged as a possible successor to Shinzo Abe. Instead, the new prime minister has called for widespread deregulation. One of his first targets, if realized, would again result in deflationary pressure.

Suga seeks a 40% reduction in mobile phone charges he says are too high. The direct downward impact on core inflation of such a move would be almost 1 percentage point based on current index weightings.

Still, economists and policy makers warn against any official de-prioritizing of the inflation target.

BOJ officials say raising a white flag on the goal would trigger a sharp strengthening of the yen that would quickly set the economy into a downward cycle, according to people familiar with the matter. There is no way the BOJ will back down when the Fed and European Central Bank are working so hard to hit it, they said.

If keeping the target doesn’t add to problems, there’s no pressure to remove it, said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities. “The price target has become a Pandora’s Box. No one wants to touch it.”

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