The Bank of Japan (BOJ) has failed to achieve its two percent inflation target ahead of this month's deadline, but analysts say the fault doesn't lie with policymakers alone.
"The BOJ needs to face up to and adapt to the reality that the two percent inflation target hasn't been achieved," said Totan Research chief economist Izuru Kato over the phone.
In late April 2013, BOJ governor Haruhiko Kuroda pledged that massive quantitative easing would put an end to two decades of deflation, setting an annual inflation target of two percent within two years.
In fact, after rising on the back of a three percentage point consumption tax hike in April 2014 inflation began to trend lower from mid-year. The latest numbers show inflation eased for the seventh straight month in February. Excluding the impact of the tax hike, inflation was unchanged from a year ago – the first time it stopped rising since May 2013.
"Qualitative and quantitative easing has seemingly done little to catalyze inflation in its first two years," said Credit Suisse chief Japan economist Hiromichi Shirakawa in a note on Tuesday.
Heart of the matter
The focus on the BOJ's inflation target has distracted from the Japanese economy's real problems, analysts said.
At 230 percent, Japan has one of the highest government debt-to-GDP ratios in the world. Easing monetary policy alone was never going to help the country start to grapple with reducing its debt load while paying for an ever growing number of pensioners, said Totan's Kato, a leading critic of the BOJ's QE program.
"Monetary policy alone cannot bring about the economic growth that is supposed to generate inflation," he said. "The aging of the population will only start in earnest in the 2020s and the government deficit will widen even more."
Meanwhile, the April 2014 tax hike that aimed in part to help pay for the mounting costs of providing care for the elderly largely backfired, tipping the economy into a technical recession. Economic growth contracted in the second and third quarters of 2014 before growing an annualized 1.5 percent in the fourth-quarter.
Coupled with stagnant wages, the tax increase proved too much for Japanese households, which have reduced spending.
What's a governor to do?
Even though cheaper oil is putting downward pressure on prices, the BOJ's Kuroda insists the two percent target can be achieved albeit around a year later assuming that Dubai oil prices – the benchmark for Japanese imports – rise from $57 currently to at least $70.
But analysts have shifted their focus to whether or not Kuroda will admit the BOJ cannot achieve its two percent target.
"Increasing divergence … on the course of monetary policy looks to mainly stem from differences in understanding the degree of commitment to achieve the two percent inflation target," said Credit Suisse's Shirakawa in his note.
Shirakawa thinks the BOJ will start tweaking its interest rate policy at the next meeting on April 30, paving the way for more easing in September or October.
Others aren't so patient.
"The slowdown in inflation risks undermining expectations of future price rises and the BOJ will respond with expansion of stimulus at the end of this month," said Capital Economics' Japan economist Marcel Thieliant in a note published on Monday.
The BOJ started its two-day policy meeting on Tuesday and will hold another meeting on April 30.