Unformatted text preview: n, on 9 March 2000, to conduct a comprehensive study on price stability. Until the study was done, discussions on inflation targeting were shelved. The study, On price stability, was discussed on 11 October 2000. The study was not conclusive on any of the issues debated earlier. The report described price
29. See HM Treasury (1999, p 29). 244 Takatoshi Ito Figure 5: Counts of Inflation Target in Minutes
No 16 14 12 10 8 6 4 2 0
l l l l l l No 16 14 12 10 8 6 4 2 0 1998 1999 2000 2001 2002 2003 2004 Note: In each of the minutes, counts is defined by the number of times the following phrases appeared: inflation targeting, inflation (rate) target, targeting inflation, the target range of the inflation rate, target for the inflation rate, numerical target for (the future) inflation (rate), special target for the inflation rate, a medium-term target for the inflation rate, a medium-term inflation rate target, the target for the monetary base and the inflation target, the target inflation (rate), a target with a clearer time horizon that the year-on-year inflation, and neither a target nor a reference rate of inflation. stability as a situation which is neither inflationary nor deflationary. Defining price stability as a state that is neither inflation nor deflation is not a definition, but a tautology. The report acknowledged that a price index had biases, but concluded that it is not easy to obtain a reliable estimate of the magnitude of bias, and that the magnitude can vary. With regard to the question of whether a quantitative definition of price stability was possible, the overall conclusion was negative. The key findings of the report were: (1) In view of the current movement of prices in Japan, an inflation rate which is consistent with the sound development of the economy is likely to be lower in the short term than in the long term. (2) If some numerical values are adopted as the definition of price stability, they are expected to be valid for a very long period of time. In view of the current development of prices in Japan, it is difficult to set specific numerical values to the definition of price stability that are consistent with the sound development of the economy. Furthermore, even if some numerical values were announced, they would not serve as a reliable guidepost in the conduct of monetary policy, and the exercise would not likely contribute to enhancing transparency of the Inflation Targeting and Japan: Why has the Bank of Japan not Adopted Inflation Targeting? 245 conduct of monetary policy. Therefore, it is not deemed appropriate to define price stability by numerical values. (3) While paying due attention to changes in the economy, the Bank of Japan will nevertheless continue to explore whether price stability can be expressed by some numerical values. After a six-month study, the report basically rejected inflation targeting. It is also notable that in the same MPM, the Outlook with Board members forecasts of prices and the GDP growth rates in the future was approved. This was intended to enhance transparency. The second wave of interest in inflation targeting, between March 2001 and early 2002, was somewhat intermittent. In March 2001, the Bank re-adopted the ZIRP with quantitative easing. The policy switch was also accompanied by a new commitment strategy that the ZIRP and quantitative easing would continue until the CPI (excluding fresh food) inflation rate stabilised above zero. A comprehensive study reported just six months earlier did not name the CPI excluding fresh food as an appropriate index, but it became the price index to watch after this meeting. The number zero was considered to be inappropriate due to the bias in the price index and the zero nominal bound. Still, the zero became a part of the commitment strategy. There seems to be a distinct change, although in the right direction, from the report of October 2000 to the commitment strategy of March 2001. Although the 9 March 2001 minutes clearly stated that the commitment strategy was not inflation targeting, mentioning the numerical value prompted a further discussion on inflation targeting in the following months. However, no concrete progress was made, and discussion died out in early 2002. The third wave of interest in inflation targeting occurred between October 2002 and January 2003, probably in response to an increasing call for inflation targeting outside the Bank, in anticipation of the expiration of the term of the Governor and two Deputy Governors in March 2003.30 There were substantial discussions on inflation targeting on 10 October 2002 and 21 January 2003. A number of reasons against adopting inflation targeting were mentioned, including: (1) the fact that none of the inflation-targeting countries had adopted inflation targeting in order to increase the inflation rate (MPM of 21 January 2003); and (2), that the main benefit of inflation targeting would be to increase inflationary expectations, but since there are no...
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