Bank of Japan sets higher inflation goal to revive economy
In this Feb. 15, 2011 photo, the Bank of Japan building is reflected on the glass covering the plate of its adjunct museum in Tokyo. (AP / Shizuo Kambayashi)
Elaine Kurtenbach, The Associated Press
Published Wednesday, September 21, 2016 9:50AM EDT
Last Updated Wednesday, September 21, 2016 12:25PM EDT
TOKYO -- Struggling to rejuvenate an ailing economy, Japan's central bank has set a more ambitious goal for raising inflation and announced steps meant to raise the profitability of financial firms.
World stocks rose Wednesday after the decision by the Bank of Japan, with Japan's benchmark Nikkei 225 index jumping 1.9 per cent.
The bank said it would seek to overshoot a 2 per cent annual inflation target that it's already failing to meet. By raising the inflation goal, it hopes to convince consumers and businesses that prices are heading up, coaxing them to spend more now and fuel faster economic growth.
Analysts expressed doubt that the new target would change the mindset of Japanese shoppers and businesses long used to a stagnant economy and flat or declining prices.
"No one believes it," said Sung Won Sohn, an economist at California State University Channel Islands. "They can't get close to 2 per cent (inflation). So how are they going to exceed 2 per cent?"
The Bank of Japan kept short-term rates at negative 0.1 per cent and said it will continue its asset purchases at a rate of about 80 trillion yen ($787 billion) a year.
But while keeping short-term rates low, it will aim to push up yields on long-term government bonds. A wider spread between short- and long-term rates would benefit life insurers and other big institutional investors, whose investment returns have slumped since the central bank imposed a negative interest rate policy early this year.
In a 61-page assessment, the Bank of Japan said its "quantitative and qualitative easing," monetary policy had succeeded in ending deflation, or falling prices. But it said that managing "inflation expectations" to encourage consumers and businesses to spend more is taking time.
"Sluggishness is expected to remain in exports and production for some time, and the pace of economic recovery is likely to remain slow," it said.
Analysts expect the central bank to eventually slash its policy rate further.
"With underlying inflation set to fall to zero in coming months, we expect the policy rate to eventually fall to minus 0.4 per cent," Marcel Thieliant of Capital Economics said in a commentary.
The world's other major central banks have spent years struggling to rejuvenate their economies, to raise inflation and get businesses and consumers to spend more.
In the United States, the Federal Reserve is expected to raise short-term U.S. interest rates -- but probably not before a meeting in December.
In December 2015, the U.S. central bank raised rates for the first time since 2006. It was widely expected to hike rates several more times this year, has held off as the U.S. economy sputtered, hobbled by weak global growth and a strong dollar that makes American goods pricier in foreign markets.
Meanwhile, European Central Bank chief Mario Draghi is asking for help from the governments of the 19 counties that use the euro currency. The ECB on Sept. 8 left its aggressive stimulus measures unchanged. It called on European governments to spend more on infrastructure projects and to enact reforms to make their economies more efficient and business-friendly.
AP Economics Writer Paul Wiseman in Washington contributed to this report