Japan's futile quest for inflation

Japan has enjoyed almost 22 years of "easy money". In some respects, its policies could be deemed a success, but in others, an abject failure.

By Torgeir Høien Chief Economist 18 July 2017

A shopping street in Japan with pedestrians pictured — Photo: Bloomberg

Japan has enjoyed almost 22 years of "easy money". In some respects, its policies could be deemed a success, but in others, an abject failure.

The Bank of Japan's policy rate has been at or below 0.5% since December 1995. The central bank innovated and currently engages in a massive program of "quantitative easing". Stripping out the occasional direct effect of sales tax legislation, consumer prices have been amazingly stable over the past 21 and a half years and since December 1995 the average rate of inflation has been slightly less than 0.1% per year.

If the Bank of Japan had strived for price stability, its policies would have been a remarkable success. However, the central bank targets 2% inflation so judging by its ability to generate inflation, its policies have been an abject failure.

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