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Unformatted text preview: nflation targeting in a strict sense was mainly whether the specific period within which the target was to be achieved was indicated. This member added that the latter policy would inevitably require extreme measures that would have serious risks or adverse effects. Given that a sharp dissociation of the new policy from inflation targeting had been recorded at the 19 March 2001 meeting, this kind of assessment is very interesting. It is not clear whether more Board members became favourable to inflation targeting or Board members wanted to counter the call for inflation targeting by saying that it had already been adopted. 48. Based on the above discussion, these members said that if long-term interest rates rose before economic activity was sufficiently stimulated, this was likely to cause the economy to make a hard landing, the opposite result to an easing of the pain arising from NPL reduction. This was because a rise in long-term interest rates would substantially increase the interest burden on the Government and firms and would negatively affect the financial position of banks since they held a huge amount of [Japanese Government bonds] JGBs (10 October 2002). 49. Another member said that the Banks current monetary easing measures along with the commitment effect in terms of policy duration had reduced interest rates with relatively long maturity to the lowest possible level, which in turn supported the Governments funding. In this sense, the current policy was desirable in terms of harmonisation with the Governments policy. This member said that it was difficult to understand why some Government officials advocated inflation targeting in the current situation despite the possibility that it would cause a rise in long-term interest rates and would increase the Governments interest payments. This member expressed a desire to hear the Government participants opinion, if possible (10 October 2002). 262 Takatoshi Ito The MPM of 21 January 2003 turned out to be the last MPM that discussed inflation targeting at length, and was probably the longest discussion to date under the regime of Governor Hayami. Again, the dominant view rejected the adoption of inflation targeting. First, [o]ne member pointed out that inflation targeting had never been adopted for the purpose of overcoming deflation by any central bank overseas, including those in New Zealand and Sweden. Second, without having conventional monetary easing measures, setting an inflation target with a specific time limit is different from situations of other inflation-targeting countries. They were implying that there are no measures to achieve the inflation target: First, there was a large output gap and a financial system problem. Second, short-term interest rates were at the zero lower bound. Third, fiscal consolidation and structural reform were in progress. And fourth, global downward pressure on prices of goods was substantial. Some recognised that the government has more tools than the Bank of Japan to stimulate the economy, namely fiscal spending and foreign currency intervention.50 Some Board members were probably unaware that the Ministry of Finance was about to launch an unprecedented scale of foreign exchange interventions starting this month (January 2003) to March 2004. What is somewhat surprising is an expression again that the Bank was already practicing de facto inflation targeting, just like the opinions expressed in the 10 October meeting.
Some members noted that the Banks commitment to continue the current monetary easing framework until the inflation rate became stably zero or more had virtually already factored in most of the effects that inflation targeting purported to achieve. This was because the commitment using the actual figure of the CPI, not a forecast figure, reflected in fact the Banks intention to achieve a small positive inflation rate, taking into account the time lag. They viewed calls for the adoption of inflation targeting as based on a misunderstanding of the side effects of policies that are required to achieve an inflation target, and that these misunderstandings had been corrected. One member raised, as a thought experiment, the question of how the Bank should approach the issue of adopting inflation targeting, if the Government were to concede total control over both fiscal and foreign exchange policy to the Bank and if the Government were to cover all losses arising from the Banks purchases of risky assets. This member said that this exercise would be useful in considering how the Bank should respond to calls to adopt inflation targeting, particularly from academics
50. Some members remarked that, to make the inflation rate positive within a relatively short period, substantially expanding fiscal spending or conducting an active foreign exchange rate policy would have to be considered as policy options. These members said that, if an inflation target were set by the Bank alone, it would not be credible, since fiscal and foreign exchange policy...
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This note was uploaded on 05/12/2010 for the course COMMERCE finc at University of Sydney.