Recession risk forces BOJ to row back on inflation goal

19 February, 2020 12:00 AM printer

TOKYO: The widening economic fallout from the coronavirus outbreak and soft consumption are forcing the Bank of Japan to message more strongly that it is no longer inclined to chase its elusive 2per cent inflation target, sources familiar with its thinking say.

After years of trying to vanquish deflation by setting an ambitious price goal, Japan’s waning recovery prospects and a dwindling policy tool-kit have made the BOJ more open to conceding that the best it can do is to keep the economy afloat, the sources said, report agencies.

The need to protect the world’s third-largest economy from a sharp downturn has became a more urgent task for the BOJ, particularly as external risks such the Sino-U.S. trade war and a coronavirus outbreak in China weaken its ability to create a virtuous growth cycle.

“While the inflation target remains very important, the focus of the BOJ’s policy has shifted toward keeping the economy on a sustainable recovery path,” one of the sources said.

The world’s third-largest economy shrank at the fastest pace in six years in the December quarter on soft consumption. Some analysts see Japan tipping into recession as the coronavirus outbreak disrupts supply chains and hits tourism.

Making matters worse is the rising prices of goods and services, once welcomed by the BOJ as a sign of progress but now seen as impeding domestic consumption at a time of intensifying global pressures.

For one thing, the prices are being driven up by companies passing on higher labor and material costs to consumers, rather than an inflationary impulse reflecting improving demand. Anaemic demand has been a perennial problem in Japan and one that policymakers have tried, and largely failed, to address for decades.

The BOJ has already been watering down its 2per cent price target, after years of massive stimulus only succeeded in partially firing up inflation even when the economy was in good shape.