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Sep 21, 2016

Bank of Japan Raises Target Despite Limited Progess - September 21, 2016

Jonathan Soble
TOKYO — Despite sagging public confidence in its ability to energize Japan’s economy, the country’s central bank on Wednesday raised its target for consumer prices and said it would continue to pump money into the economy until it succeeded.

The announcement is likely to add fuel to the debate about the central bank’s effectiveness and credibility. The bank has conspicuously failed to meet its earlier target.
The bank, the Bank of Japan, said on Wednesday that it intended to “overshoot” its previous target of 2 percent year-over-year inflation growth. Its preferred measure of inflation stood most recently at minus 0.5 percent.
Falling prices are associated with weak economic growth. Deflation makes it harder for companies to raise prices or increase sales, making it difficult for them to raise wages or invest in their businesses.
The bank said it would keep its benchmark short-term interest rate unchanged at minus 0.1 percent. But in another new measure, it said it would take steps to ensure that longer-term interest rates did not fall too far. The new measure, which the bank termed “yield curve control,” is intended to keep rates on 10-year government bonds near zero, the bank said.
The bank has been unleashing financial firepower on the economy, mainly by buying up government debt worth trillions of yen, to keep borrowing costs low. But in one respect, its tactics have arguably worked too well.
Long-term bond rates have followed short-term rates below zero. Although that has not unleashed a hoped-for surge in borrowing by households and businesses, it has hurt revenues at banks and other financial institutions, where differences between the cost of short- and long-term credit are a major source of revenue.
The Bank of Japan said propping up long-term rates was necessary to keeps its efforts to stimulate the economy “sustainable.”