At its October Monetary Policy Meeting, the Bank of Japan decided to leave its policy rate unchanged and disclosed for the first time its assessment that the underlying inflation rate had reached the 2% price stability target. This article examines the background and the mystery surrounding the underlying trend in prices.
At its meeting at the end of October, the Bank of Japan decided to leave its policy rate unchanged. At the same time, it published for the first time its assessment that the underlying inflation rate had reached the 2% price stability target. This has once again brought the relationship between prices familiar to the public and monetary policy decisions into focus.
The year-on-year increase in the all-items consumer price index excluding fresh food has remained around 3% for an extended period and is currently at roughly that level. The article explains how the figures previously regarded as the underlying inflation rate have diverged from actual conditions and become the subject of debate.
The article examines the Bank of Japan's definition and outlook for the underlying inflation rate, the historical accuracy of its forecasts, and the relationship between the history of monetary easing and current policy decisions. It indicates the issues ahead, including how the Bank's adherence to 2% is affecting the form of monetary easing and its relationship with fiscal policy.