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Unformatted text preview: till contains energy prices. Inflation Targeting and Japan: Why has the Bank of Japan not Adopted Inflation Targeting? 237 Figure 4: Quantitative Easing
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Aug 01 May 03 Dec 01 Apr 03 Apr 03 Oct 02 Dec 01 Aug 01 Mar 01 1998 1999 2000 2001 2002 2003 2004 Long bond purchases (LHS) Current account balances target (RHS) last two years of the Hayami regime, and the amount of monthly purchases has remained the same since Mr Fukui became Governor. Mr Fukui was more aggressive in increasing the target for current account balances at the Bank of Japan. 2.5 ZIRP and exit conditions The ZIRP was adopted on 12 February 1999, and two months later Governor Hayami elaborated on the conditions when it would be ended (in the press interview of the Governor, on 13 April 1999, available in Japanese only on the Bank of Japans homepage). However, neither he nor the Board defined what deflationary concerns meant or when and under what conditions they would be judged to be dispelled. The Bank had also not decided which price indicator should be used to define inflation/deflation or the number that would be a threshold of inflation/deflation.26 The reference to deflation concerns left room for an interpretation that deflation was not necessarily being experienced at the time. Many economists contended that the economy was already in a state of deflation. But the Bank, and the Governor, was perhaps indicating that the problem was concern about, rather than the reality of, deflation.
26. Price indicators such as the GDP deflator, CPI, and Wholesale Price Index (WPI) often move differently. Even when these indicators exhibit the same movement, the extent to which the sound development of the national economy will be achieved may depend on such factors as whether property prices are stable or rising sharply (Okina 1999a, p 164). 238 Takatoshi Ito In 2000, the ZIRP was lifted, as the exit condition was met, as judged by a majority of the Board members. In the minutes of 11 August 2000 the reason for judgement is explained as follows:
On the current economic situation, members shared the view that the economy was recovering gradually, with corporate profits and business fixed investment continuing to increase. As for the outlook for the economy, many members expressed the view that the economy was likely to recover gradually, led mainly by business fixed investment. Accordingly, the majority of members agreed that the economy had reached the stage where deflationary concern had been dispelled. It is surprising that the above paragraph made no mention of price movements in the past or future. Deflationary concern was judged to have been dispelled, because of economic recovery (an increase in real GDP), corporate profits, and business fixed investment. Although one could interpret the paragraph as a forward-looking inflation judgement economic recovery results in price increases there is no explicit mention of this linkage. A more likely interpretation was that the Board members at that point were not using price movements to guide policy, because price declines were due to supply-side factors and technological innovation and cheap imports were a good thing. The Bank of Japan was also responding to new calls for a more careful definition of price stability. On 13 October 2000, two months after raising interest rates, the Policy Board issued a report called On price stability. In the document, price stability was defined as a state that is neither deflation nor inflation. This apparent tautology did not help settle the debate. When the ZIRP was effectively reintroduced in March 2001, the condition became more concrete: the CPI excluding fresh food was identified as the right price index on which to focus. The relaxed monetary policy would continue until the inflation rate measured by the CPI excluding food became stably above zero. However, what stably above zero meant was not defined. But, at least, it specified that the inflation rate had to be positive at the time of ending the ZIRP. Clearly, if this condition had been applied from the beginning, the ZIRP would not have been lifted in August 2000. Therefore, such a condition can be seen as introducing a tacit admission that the action of August 2000 was a mistake. The condition was further clarified in October 2003. In October 2003, stably was further defined as above zero for a few months and when there would be no risk of falling back into deflation. Also, while these two conditions were explicitly mentioned as necessary conditions, they may not be sufficient. In summary, the exit conditions from ZIRP and the definition of price stability have changed over time, as follows: (1) February 1999. Adoption of de facto ZIRP. (2) April 1999. Exit condition was until deflationary concerns are dispelled. (3) August 2000. Exit from ZIRP. Inflation Targeting and Japan: Why has the Bank of Japan not Adopted Inflation Targeting? 239 (4) October 2000. The report called On price stability was issued. Price stability was de...
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