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Home Publications Blogs Beat the Press Big News: Japan Targets Higher Inflation

Big News: Japan Targets Higher Inflation

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Wednesday, 15 February 2012 05:26

Japan's central bank took the extraordinary move of targeting a higher rate of inflation, setting a 1.0 percent inflation target. This should have been front page news.

The idea of a central bank setting an inflation target above its current level, in the hope of raising inflationary expectations, dates back to a paper by Paul Krugman in the late 90s. (Federal Reserve Board Chairman Ben Bernanke endorsed the same policy when he was still a professor at Princeton.) The logic is that if the central bank can credibly commit itself to a higher inflation target then the commitment could create self-fulfilling expectations. Businesses would invest and consumers would spend based on the expectation of higher inflation, which would mean a lower real interest rate. The increased business activity would then lead the inflation targeted by the bank.

This decision by the Japanese central bank will provide an opportunity to test whether such targeting can work. If it proves successful, it may lead to more pressure on other central banks (like the Fed) to go this route.

Comments (5)Add Comment
It is big news, but...
written by LSTB, February 15, 2012 9:19
...a 1% target sounds low.
...
written by S. D. Jeffries, February 15, 2012 10:03
This policy of targeting a higher rate of inflation is truly a double-edged sword: it potentially punishes savers and those on a fixed income while, hopefully, spurring economic activity. It seems to me the trick is to make sure wages also rise along with prices. Otherwise the policy will result in more bane than benefit.

If I'm wrong about this, I hope someone will correct my impression.
Japan is in a Deep Hole
written by Paul, February 15, 2012 10:14
Unlike the Commie Keynesians in China whose economy is roaring ahead at nearly double digit rates, Japan's leaders encourage its citizens to save as much as possible while discouraging consumption. A 1% inflation target is just a bad joke considering what Japan needs to do to get out of its 22 year recession.
...
written by skeptonomist, February 15, 2012 10:46
This is magical economics - it would be great if the Fed could control inflation by declaration, but there is absolutely no evidence that it can. In the last few years, a great many people claimed to believe that the Fed's quantitative easing and other actions would create massive inflation. According to the monetary-credibility hypothesis, this should itself have caused inflation. Did it? In the real world, inflation is controlled by commodity prices, especially oil and grains, and the effects of major wars. There have been no major bouts of inflation in the U.S. without either war or commodity shortages.

Polls consistently show that inflation and interest rates are low on the list of concerns of businessmen and consumers, except when inflation is actually high and/or the Fed has raised interest rates to punishing levels. Businessmen expand or contract based on expectation of demand, not on some hypothetical calculation of future real interest rates - for them, such calculations are meaningless without reasonably assured demand. Consumers buy for various reasons, but except possibly for house purchases, interest rates are not critical - or else they would not be paying the ridiculous rates on credit card balances.

The BOJ and the Fed may not have formally raised their inflation targets in the past (the Fed does not have a formal target), but they have at times certainly indicated their determination to expand the money supply and this has had no effect in either country. There are good reasons why world-wide inflation may increase in the near future, but they have to do with events in the middle east or possibly weather events, not empty declarations by central banks. Inflation caused by oil shortage is not going to be beneficial.
Let's Hope Our Central Bank Will Learn From Japan
written by Jerry Jones, February 18, 2012 12:36
Let's hope our own central bank will learn a lesson from Japan's central bank. Thanks for posting this article. I read various news sources and this totally slipped by me. Incredible stuff.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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