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Unformatted text preview: fined as a condition where there is no inflation or deflation. (5) March 2001. Return to ZIRP with a new exit condition: until the CPI (excluding perishables on a nationwide basis) registers stably at zero per cent or an increase year on year. (6) October 2003. Elaboration of two necessary exit conditions: a backward-looking one, the inflation rate has to be, on average, at zero per cent or above for a few months; and a forward-looking one, the inflation rate should be projected not to fall back to deflation. One might ask whether these exit conditions constitute de facto inflation targeting. As the inflation indicator is specified and the inflation target floor rate is at least mentioned, the commitment seems to be a half-step toward inflation targeting. But there are four important reasons why we should not regard the exit conditions as fully-fledged inflation targeting. First, the inflation target ceiling rate is not specified. Second, the projected date when the Bank would like to achieve its target is not specified. Third, the conditions are more reactive than pro-active: the Bank is not expressing that it would do everything it takes to achieve the inflation rate. Instead, it reads that the conditions may occur with luck or some forces external to the Banks actions. Fourth, no accountability mechanism is attached to the current exit condition. 2.6 Purchases of equities and real-estate investment trust funds (REITs) Some economists outside the Bank advocated that the Bank purchase riskier assets than government bonds, including the listed market-based stock index funds and the listed REITs. The Bank has refused to take these unconventional policy actions on several grounds. It was argued that these are risky assets that the central bank would not normally purchase, and that they are also more like fiscal operations rather than monetary operations. Piling up risky assets in the central bank balance sheet was also suggested to be a bad idea, since it may result in a situation in which the Bank would run huge losses and lose the confidence of the people. However, in September 2002, the Bank of Japan started to purchase equities held by commercial banks. This policy was introduced to reduce the risks of stock price fluctuations on commercial banks balance sheets and, as a result, their riskbased capital ratios. The policy was intended to contribute to financial market stability. The Bank of Japan was careful to discuss this in the regular Policy Board Meeting, as opposed to the MPM. The ceiling for purchases was set at 2 trillion yen initially, but expanded later to 4 trillion yen. As stock prices dropped from the time of implementation (October 2002) to May 2003, a lot of purchases were made, but after stock prices started to recover from the trough, commercial banks held on to equities. 240 Takatoshi Ito 2.7 Unsterilised intervention A number of economists have advocated foreign exchange interventions as one expansionary measure that the central bank and the Ministry of Finance could undertake at the zero interest rate. Two explicit benefits have been cited. First, intervention would lead to a depreciation that would stimulate the export sector and increase import prices (which is good for an economy suffering from deflation). Second, foreign bonds purchased could be used as assets against which monetary base can be provided to the market. Increasing the monetary base by buying foreign bonds is essentially unsterilised intervention. In normal circumstances, when the interest rate is positive, the standard textbook story is that sterilised intervention may not work, because the interest rate would not change, and unsterilised intervention would work, because the increased monetary base would lower the interest rate. However, at a zero interest rate, the interest rate channel disappears. Whether one thinks that unsterilised intervention has a greater effect than sterilised intervention, even at a zero interest rate, then becomes equivalent to a question of whether quantitative easing, in terms of increasing the monetary base, is effective or not. Svensson (2001) was explicit in recommending unlimited unsterilised intervention to peg the yen/dollar rate at a depreciated level to stimulate export demand. There are some complications to this kind of proposal. First, Japan is a large economy that is already running current account surpluses. An explicit depreciation policy and more exports may not be politically acceptable, as argued in Ito and Mishkin (2004). Another complication is that foreign exchange interventions are conducted by the Ministry of Finance in Japan, so that unsterilised intervention has to be coordinated between the Ministry of Finance and the Bank of Japan. When several proposals were made for intervention during the ZIRP in 20002002, interventions were rare events (see Ito 2003 for a discussion of the effectiveness of sterilised interventions from 1991 to 2002). However, from January 2003 to March 2004, interventions suddenly became quite frequent and of a large size. In 2003, perio...
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