Bank of Japan Could Use Some Goal Post Shifting – Wall Street Journal

Jan. 21, 2015 3:50 a.m. ET

The Bank of Japan's inflation goals are looking increasingly out of reach. Its next move could be to redefine the target.

Central banks around the world are having trouble with their targets. Unwilling to keep the franc down against the euro, the Swiss National Bank decided to give up entirely. The European Central Bank, falling far short of its 2% inflation target, seems poised to embark on a new quantitative easing program this week.

The BOJ has also already indulged in goal post shifting. The original statement accompanying its big-bang easing in March 2013 set a 2% inflation goal in two years. A literal reading would suggest a time frame ending this March. But this has since been reinterpreted to mean the fiscal year ending in March 2016. An average person might call this three years.

Even this timeline now looks untenable. The BOJ on Wednesday lowered its inflation forecast for the year to March 2016 to 1.0% from 1.7% previously. This is still more optimistic than private-sector forecasters, who see inflation turning negative in the spring and coming out around 0.5% for the whole fiscal year. The BOJ expanded some lending programs at the meeting, but the changes were minor.

The central bank now faces unappealing choices. Cranking up the printing press so soon after the last big move in October would risk seeming imprudent, especially with Japanese government bonds now sporting negative yields all the way up to four years.

Instead, the BOJ might reconsider its definition of inflation. It currently targets a 2% rise in so-called core CPI, which in Japan excludes fresh foods. A shift to targeting what in Japan is called "core-core CPI," which also excludes energy, as suggested by economists at Morgan Stanley, would buy the central bank breathing room.

It also makes economic sense. The central bank could credibly argue that "core-core CPI" better reflects underlying inflationary pressure when energy prices are fluctuating wildly. And easing because of cheap oil prices risks overstimulating the economy, since while cheaper energy keeps inflation low in the short term, it also frees up cash for consumers and businesses to spend elsewhere.

Even with such a change, the BOJ could remain well off-target. HSBC forecasts that the "core-core CPI" will rise only 0.8% in the year to March 2016.

That's still a long way from 2%, so additional easing sometime over the next year seems a possibility. But the BOJ seems likely to try moving the goal posts again before attempting a long-shot field goal.

Write to Aaron Back at aaron.back@wsj.com