TOKYO - For the Bank of Japan, achieving its long-sought 2 percent inflation target is not the end of its quest for price stability but the beginning of a new phase in its monetary policy, analysts say.
The central bank concluded at a two-day policy meeting through Friday that underlying inflation has "generally" reached the 2 percent goal, nearly 14 years after the government and the BOJ set the target in a coordinated effort to lift the country out of its deflationary malaise.
The central bank launched a large-scale monetary easing policy in April 2013, dubbed the "Kuroda bazooka" after then Governor Haruhiko Kuroda, aimed at beating chronic deflation and creating a virtuous cycle between wages and prices.
Analysts say the BOJ's latest assessment reflects a fundamental change in Japan's inflation dynamics, driven largely by a global inflation surge rather than the growth of demand pursued by the central bank.
The question now is whether inflation can remain at around 2 percent, an ultimate goal for the BOJ to ensure price stability, and how it should respond if upward pressures on prices continue to build.
The BOJ faces a complex challenge in monetary policy, seeking to raise interest rates to prevent inflation from overshooting while ensuring the policy will not undermine wage growth and domestic demand.
"The BOJ may have been slow to recognize that underlying inflation had reached, or even exceeded, the target," said Shinichiro Kobayashi, principal economist at Mitsubishi UFJ Research and Consulting.
He added that price increases may have gone beyond the desired pace. BOJ data show that Japan's wholesale prices have stayed around or above 7 percent since May, possibly pushing consumer prices up sharply in the coming months. BOJ Governor Kazuo Ueda has warned against elevated wholesale prices.
"The greatest significance of reaching 2 percent is that there is no longer a need to maintain an accommodative monetary environment," Kobayashi said.
Shifting away from its longstanding ultraeasy policy to lift prices, the BOJ must now assess at each policy meeting whether more rate hikes are needed to prevent inflation from accelerating.
Kobayashi attributes the achievement of 2 percent inflation not only to the easing policy but to changes in economic conditions following the COVID-19 pandemic.
Supply chain disruptions, recovering demand, labor shortages and higher import costs have all made it easier for companies to raise prices, while consumers have become more accepting of price increases due to wage growth.
Yuichi Kodama, chief economist at Meiji Yasuda Research Institute, was more skeptical about the BOJ's role in realizing the inflation goal.
"Taking more than 10 years to achieve the target suggests that monetary policy had little to do with it," Kodama argued, citing the global inflation surge and the resulting rise in inflation expectations as greater contributing factors.
The BOJ vowed to meet the 2 percent goal in roughly two years when the Kuroda bazooka was launched, but it had to repeatedly push back the timeframe.
Kodama said it is the BOJ's responsibility to anchor underlying inflation around 2 percent over the longer term.
"I don't think the supply-demand gap is generating much inflationary pressure. It is probably around zero or slightly positive," he said. "A bigger factor is that rising commodity prices have pushed up people's inflation expectations."
The BOJ believes higher wage increases in recent years have supported private consumption, leading to price increases. But the outlook for demand-pull inflation remains unclear, some analysts say.
Consumer spending could slow as long as the Middle East crisis keeps oil prices high and the yen remains weak after dropping to a 40-year low against the U.S. dollar.
Both factors elevate import costs, as Japan relies heavily on the region for energy supplies and a weaker yen raises the costs of goods from other countries.
"At some point, we need to examine whether the 2 percent inflation target is still appropriate for Japan today," Mitsubishi UFJ's Kobayashi said.
"With Japan's population shrinking and demand declining, was it the right goal in the first place?" he asked.
