BoJ’s 2% inflation target looks difficult to achieve

Almost all industry participants were sceptical about the BoJ's 2% inflation target and the new timeframe for achieving it. They believe it will be difficult to reflate Japan's economy following decades-long deflation, particularly given the unexpected oil price shock. 

Most agreed that 2% was an appropriate target for the BoJ to maintain, however, even though inflation in Japan has seldom reached 2% in the past 20 years (except following temporary external shocks or sales tax hikes).

About 90% of participants believed the BoJ would need to ease again this year, though some were concerned about the impact of substantial Japanese government bond (JGB) purchases on the market. Cutting the interest rate on excess reserves was mentioned as an option, although its market impact was also debated.

On 19 June, the BoJ announced a new framework for its monetary policy meeting, effective from January 2016. It reduces the number of monetary policy meetings from 14 to eight, on a par with the Fed and the European Central Bank. 

The BoJ will publish four quarterly economic outlook reports per year, from two currently. Each board member's GDP and inflation forecast and risk assessment will be released.

This step by the BoJ positively should improve transparency and market communication. The BoJ will be able to provide better guidance on future policy direction, rather than only on the current easing environment. 

More importantly, the new framework will facilitate the tapering process when the BoJ wants to reverse its easing course