Two-year inflation target would be a step too far

One of the policy changes that the new Bank of Japan Governor is likely to consider is a further clarification of the 2% inflation target. Mr Kuroda himself has reportedly suggested an explicit horizon of two years. As it happens, the consumption tax hikes currently planned by the government should lift headline CPI inflation above 2% in both 2014 and 2015. Even excluding tax effects, inflation could hit 2% if the yen remained weak and the local currency price of imported commodities continues to surge. But what Japan really needs is demand-pull inflation, not cost-push. The large amount of spare capacity in the economy suggests that underlying inflation is unlikely to reach 2% on a sustained basis for many more years.