In his Bloomberg View article today, Narayana Kocherlakota writes “A Possible Cure for Japan’s Low Inflation”:
Suppose, for example, that the Bank of Japan had announced a target of 4 percent in March 2013. Actual inflation over the past three years would probably have been higher — teaching wage-setters and price-setters that if they want to avoid costly mistakes, they’d better pay attention to what the central bank says will happen. Having built up that credibility, the central bank could then more easily guide expectations to its long-run goal of 2 percent.
Before Abe, Japan had an implicit 0% inflation target. By establishing an explicit 2% target, things should have worked out as Kocherlakota argues. But they didn´t! Does that mean that if you really want 2% inflation you should target 4%? Doesn´t sound reasonable.
As the chart indicates, Japan´s problems began when the BoJ allowed NGDP to stagnate. It appears it would be much more effective for Abe/Kuroda to stipulate that the BoJ would “not rest” until nominal spending (NGDP) had reached the stated level, from which it would henceforth grow at a specified rate.