Japan’s temporary overshoot attempt

The Bank of Japan has been tinkering with its monetary policy, and one thing about it struck me as curious.

There is now the determination to try to overshoot the inflation target.  The idea is to try to raise the inflation expectations of a significant portion of those surveyed in Japan who think inflation will undershoot the current target.  I doubt this is going to succeed, although it may also do little harm.  The effort seems to be based on a hydraulic notion of why inflation expectations of some are under the target.  As though it’s assumed they guess inflation will be delta*target, where delta<1.  Raise the target temporarily, and you get inflation expectations equal to the old, and actually desired target.  That lowers real rates [nominal rates minus expected inflation] boosting demand, and inflation itself.

However, expectations are probably not so hydraulic, especially in a country where monetary policy failure and weak inflation/deflation has brought more scrutiny and awareness.

If expectations are undershooting the target because some think that the BoJ lacks either an effective instrument, or the necessary resolve to change the situation, then simply raising the target won’t help.

The temporary overshoot intention isn’t helped by not putting a clear number on it, nor a duration.  So we will have no way of knowing whether the BoJ succeeded or not, and what might trigger some subsequent tightening.

 

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2 Responses to Japan’s temporary overshoot attempt

  1. Steve Williamson says:

    The recent “change” in policy really didn’t change anything. It was basically a promise to do more of the same. You say: “…some think that the BoJ lacks either an effective instrument, or the necessary resolve to change the situation…” I think it’s neither. They simply don’t know what they’re doing.

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