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Unformatted text preview: by around the end of summer 2000. It was advantageous that a comprehensive study would be conducted, but in retrospect, this action put off, or at least put aside, any further discussions of inflation targeting, until the studys completion. In the meantime, in the meeting of 11 August 2000, the ZIRP was ended on the majoritys judgement that deflationary concern was dispelled. In fact, at that point, deflation was not defined by the Board, since it was under study. Although it was planned to be released by the end of summer 2000, the study was not issued until October 2000. On 13 October 2000, the long-awaited document On price stability was released, along with the Release of outlook and risk assessment of the economy and prices. Both documents were discussed by the Board. The discussion reveals the thinking of Board members at the time quite well. Below are excerpts from the minutes and my comments on them.
[D]iscussions centered on the issue of expressing price stability by a numerical value. A few members expressed the view that the optimal rate of increase in price indexes over the medium and long term was small but positive considering issues such as the upward bias of price indexes and the zero constraint on nominal interest rates. This view on optimal rate of increase in price indexes expressed by the few members seems quite appropriate and completely non-controversial from the view of mainstream monetary economics. What is surprising is the discussion that follows.
However, many members including those above agreed with the conclusion of the report that it was not appropriate to define price stability by numerical values at this point for the following reasons. First, supply-side factors such as technological innovation were exerting downward pressure on prices at present. And second, the available orthodox monetary policy measures were limited. At the same time, these members shared the view that the Bank should continue to explore whether price stability could be expressed by numerical values, taking account of actual changes in the market and the economy. This paragraph summarises why the Bank of Japan did not adopt inflation targeting in 2000. First, it was thought that if supply-side factors were affecting price levels, inflation targeting was inappropriate. However, as was discussed earlier in this paper, demand, not supply, factors were dominant, since output was sluggish in Japan, but not in the United States. Also, supply-side factors mostly affect relative prices, and average prices are more affected by macroeconomic factors and policies. Second, the Board recognised that the room for manoeuvre with conventional policy measures, that is, the interest rate, was limited. At this time, the Bank had just raised the interest rate to 0.25 per cent, and the majority of the Board was not considering lowering it back to zero. Board members asked for a number of further issues to be studied: (1) the relationship between price stability and financial system stability; (2) whether it would be inappropriate to use numerical values to express a price stability objective, 258 Takatoshi Ito as long as downward pressure on prices from the supply side remained; (3) ways to improve data on the supply side that were essential for assessing prices; and (4) ways that countries that had adopted inflation targeting would deal with issues related to technological innovation, which made compilation of reliable price statistics more difficult, and asset prices, which were becoming increasingly important for the conduct of monetary policy. These issues reveal that the majority of Board members thought either that setting a numerical target was a bad idea, when supply-side factors are having a large impact, or that more research was needed on the issue. The following paragraph seems to give a summary view of the majority of the Board:
[A]nother member said that it would be difficult to define price stability in terms of numerical values in view of structural changes that Japan was undergoing, bias in price indexes, and Japans economic situation which was subject to strong influence from external developments. Therefore, the member thought that the issue should be studied further and would, at this point in time, prefer to give only a qualitative or conceptual definition of price stability. The member further commented as follows. The discussions on the issue of quantifying price stability had been initiated in response to public criticism that the goal of monetary policy was unclear. Therefore, the discussion started from the very fundamental question of the significance of price stability, but some issues required further study. In that sense, the member would like to emphasize that the conclusion was not fully satisfactory. In contrast, one member in favour of inflation targeting gave the case for immediate adoption:
One member, while supporting the Banks plan to make public its thinking on price stability, disagreed with the contents of the report as the member believed that the Bank should immediately set a numerical tar...
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This note was uploaded on 05/12/2010 for the course COMMERCE finc at University of Sydney.