Is the BOJ's 2% inflation target still relevant?

The Bank of Japan's 2 percent annual inflation target was set by the central bank and the government in 2013 as a yardstick in the unprecedented massive monetary stimulus program to end the deflation that had gripped Japan's economy for years. Five years on, the inflation target remains elusive — even though the economy appears to be in pretty good shape. Gross domestic product had two full years of uninterrupted growth until it suffered an annualized 0.6 percent fall in the January-March period. Major companies continue to enjoy record profits, and the job market is now the tightest in decades. The economy is obviously no longer gripped by the deflationary spiral that the BOJ's monetary stimulus sought to end.

And yet the central bank clings on to its 2 percent target, and it says the tweak of the monetary policy that was decided at its policy meeting this week is designed to make the policy more sustainable over the longer term — now that it's deemed the inflation target will take longer to achieve than had been anticipated. The BOJ should review whether 2 percent inflation is really necessary for the economy going forward, especially given that the policy intended to achieve the target is causing some unfavorable side effects that needed to be addressed through the latest tweak.

When the central bank introduced the massive monetary stimulus five years ago, BOJ Gov. Haruhiko Kuroda was confident that the 2 percent inflation goal could be achieved within two years. Since then, however, the target date has continued to be pushed back. In its latest review of the economy's prospects, the BOJ lowered its inflation forecast in fiscal 2018 from 1.3 percent to 1.1 percent, from 1.8 percent to 1.5 percent in 2019 and from 1.8 percent to 1.6 percent in 2020 — confirming that the goal is still nowhere in sight. The consumer price index in June, excluding fresh food, rose a mere 0.8 percent from a year ago. Kuroda admits that in order to achieve the 2 percent target, the large-scale monetary stimulus needs to be pursued longer than had been anticipated.