In some cases the central bank cannot control inflation while in others it cannot promote it!

Japan falls in the latter category. According to this article in the WSJ “Japan´s price target looks difficult”:

The nationwide core consumer price index rose 1.3% from a year earlier in June, after adjustment for a recent sales-tax hike, below a 1.4% increase the previous month, according to government data released Friday. Inflation moderated in May and June due to falling energy prices and a stable yen, which has put the break on growth in import costs.

Pessimists believe Japan’s recent exit from years of deflation has occurred mainly because of a collapse in the yen’s value last year, a result of a massive monetary stimulus not unlike the U.S. Federal Reserve’s. That decline pushed up the cost of fuel and other imports. As the yen has regained some lost ground this year, this pressure on prices has abated.

This is a common trap. People think of inflation as a price phenomenon and not as a monetary phenomenon. In that case: “a stable yen has put a break on growth in import prices”. But later: “the yen collapsed as a result of a massive monetary stimulus”.

So the correct line of thought is clear: Monetary stimulus caused inflation expectations to rise which caused the exchange rate devaluation (the “collapse” of the yen´s value).

But because the exchange rate is a “perfectly flexible” price it changes immediately, while inflation lags behind. This leads many to think it was the depreciation which “caused” the rise in inflation, when in fact both are driven by the rise in inflation expectations brought about by the monetary expansion.

The charts give a clear illustration. The inflation is that of the CPI-Core and is adjusted for the rise in the consumption tax in April of this year.

Note that the yen begins to depreciate immediately following the introduction of Abenomics. Inflation takes a while to “take-off” and by the time it does, the yen has already “stabilized”.

The articles author starts off by giving (unknowingly) the solution to the “mystery” of why it is thought the price target looks difficult. He writes:

Japan´s annual inflation rate was stable enough in June that it is unlikely to trigger a fresh round of monetary stimulus by the Bank of Japan.

So, it´s up to you, Kuroda, to make it likely!