The central bank of Japan has been struggling with low inflation, which normally go together with sluggish economic growth. If the Bank of Japan wants to succeed in its efforts, it should intend to go past its inflation target.
In March 2013, the BoJ announced a 2 percent inflation target. Since then, the central bank has made some progress, with the consumer price index edging up at an average annual rate of 1.3 percent. This progress is considerably better than what the Federal Reserve has done, where the prices in the US have climbed at an average annual rate of just 0.8 percent since March 2013.
However, the BoJ wasn’t still able to reach its target. On April 2013, the central bank has broadcasted that it anticipated to hit the inflation target in approximately 2 years, but even now it is still far from reaching that goal.
A possible reason behind this is the insufficiently ambitious strategy. In order to achieve higher inflation, people and businesses must be convinced that prices will begin to increase at a more rapid pace. The Japanese central bank intends to get those inflation expectations up to 2 percent, but the BoJ doesn’t want them ever to increase above that level. According to a paper by Chicago Booth School of Business professors KindaHachem and Jing Cynthia Wu, this limitation can be self-defeating.
The professors state that a lot of people predict inflation by simply observing how fast the prices have been increasing recently. The BoJ wants people to pay attention instead to what the central bank says inflation will be. With this, the Japanese central bank will perform more effectively if it initially targets above its longer term inflation goal.
For instance, if the BoJ had announced an inflation target of 3 percent in March 2013. The actual inflation over the previous 3 years would perhaps have been higher, teaching price-setters and wage-setters that if they do not want to make a huge mistake, they should be paying attention to what the Bank of Japan says will happen. After building up that credibility, the BoJ could then guide the anticipations to its longer term inflation target of 2 percent more easily.
We believe that the Bank of Japan will hit its inflation target eventually, but the central would probablyachieve it sooner if it initially tried to overshoot its goal.