This preview shows page 1. Sign up to view the full content.
Unformatted text preview: get for the inflation rate. The member expressed the following opinions. First, without a numerical target, the Bank would not be able to assess its performance and would not be accountable to the public as a central bank. Second, it was natural that an inflation target should be adjusted in line with structural changes and this would make the adoption of an inflation target viable. And third, the European Central Bank (ECB) had defined price stability as year-on-year price increases of below 2 per cent, and some central banks in industrialized countries, such the United Kingdom and New Zealand, had adopted inflation targeting. In view of this, the report should explain convincingly and in depth why Japan did not have a numerical target for prices. After the discussion on the document of 13 October 2000, there was no significant discussion on inflation targeting or price indices until 19 March 2001, when the Board decided to change the monetary policy instrument from the interest rate to the current account at the Bank of Japan, effectively restoring the ZIRP. The minutes of the 19 March 2001 meeting contain interesting discussions on adopting a condition for continuing the ZIRP. The Board members agreed to ease monetary policy, given the deteriorating economic conditions. Members agreed that (1) it was necessary to make a strong commitment in terms of policy duration in order to ensure the "commitment effect", and (2) it was desirable to make the commitment clearer than "until deflationary concern was dispelled", the phrase the Bank had used under the zero interest rate policy. In a sense, they admitted that Inflation Targeting and Japan: Why has the Bank of Japan not Adopted Inflation Targeting? 259 this time the Bank had to explain the ZIRP better than it had when it was previously used (from February 1999 to August 2000). Thus, a clearer expression than until deflationary concern was dispelled was sought. The change in the policy instrument and the exit conditions were decided as follows: (1) The Bank will change its main operating target for money market operations to the outstanding balance of the current accounts at the Bank of Japan. (2) The Bank will continue the new framework for money market operations prescribed in (1) until the CPI (excluding perishables, on a nationwide basis) registers stably a zero per cent or an increase year-on-year. It is remarkable that the Board agreed on: (1) the particular price index, CPI excluding fresh food, that it was going to focus on as a condition of monetary policy; and (2), the numerical number, zero. The zero was chosen because the Board members were in agreement that a situation that was neither inflationary nor deflationary was desirable, and thus, it was appropriate to make a commitment to continue the policy until the rate of increase in the CPI recovered to zero percent. One member, citing a study that suggested the upward bias in the CPI in Japan was 0.9 per cent, insisted that a higher number was chosen, but did not prevail. Instead, [o]ne member added that, although the Policy Board should further discuss the desirable rate of increase in prices, it would be appropriate to use a phrase such as "stably a zero percent or an increase year on year" and imply that it would conduct policy "aiming at a small but positive inflation rate". In the end, the vote was taken to endorse a new policy: (1) change the main operating target for money market operations to the outstanding balance of the current accounts at the Bank of Japan; and (2) make a commitment to continue this new framework until the CPI registered stably a year-on-year increase of zero percent or more. This meeting finally put to end the discussion of what was the appropriate price index. The discussion had persisted for almost three years. Even in the major document On price stability, which was released just six months earlier, the question was not settled. But, suddenly, in this MPM, the question of the appropriate price index was resolved. This MPM is also remarkable in the sense that the Board endorsed what was considered to be quantitative easing that had long been resisted. Specifically, the Board voted to (8 in favour, 1 against): (3) change the main operating target for money market operations to the outstanding balance of the current accounts at the Bank of Japan; (4) make a commitment to continue this new framework until the CPI registered stably a year-on-year increase of zero percent or more; (5) increase the amount of the Banks outright purchases of government bonds when it was considered necessary in order to provide liquidity smoothly; (6) establish a clear ceiling for the Banks government bond holdings, set at the outstanding amount of banknotes issued; and (7) increase the outstanding balance of current accounts at the Bank to around 5 trillion yen for the time being. What was curious about this MPM discussion is that the Board members denied any link of this new commitment strategy to inflation targeting. 260 Takatoshi Ito Many members agreed that such a commitment differed from inflation targeting in that under the latter a desirable inflation rate from a medium- to long-term perspective was set as a target and monetary policy...
View Full Document