Unformatted text preview: tion targeting policy, where every possible measure was employed to create a certain level of inflation, and preferred the former, although it involved technical difficulties. These comments suggest a deeper understanding of the different types
45. Some members questioned the consistency between setting a price target and reducing the uncollateralised overnight call rate by 0.1 percent. In addition, one of the above members doubted that announcing such a target could have effects on the activities of people expecting deflation. [Para] Another member expressed an opinion that the Bank did not need to indicate a specific target figure because it had already been widely known that the Bank has responsibility for stabilising prices, that is to avoid inflation and deflation, as stipulated in Article 2 of the Bank of Japan Law. [Para] Another member expressed a view that, in implementing monetary policy, it was natural that a central bank has a will to avoid genuine deflation. The member was, however, of the opinion that it was not appropriate to declare such a will in the form of inflation targeting, and in addition, it was difficult to include the declaration of the will in the directive on money market operations, and the will should rather be expressed in some other forms and styles (Minutes of the Board, 27 November 1998). 46. Coincidentally, this was the first MPM after Itos (1999) Financial Times article. 256 Takatoshi Ito of inflation targeting, the reasons why such a policy was advocated, and the cautions involved in setting a target. The MPM of 10 February 2000 provided another instance of detailed discussion on inflation targeting. The following was recorded as the consensus of the Board on inflation targeting: First, they were against inflation targeting that aimed at creating a certain level of inflation a reflation policy and had no intention of adopting such a policy. And second, inflation targeting that aimed at making monetary policy more transparent and expressing a strong commitment to price stability was worth considering, although it had some technical difficulties. Many members shared the opinion that, in deliberating inflation targeting in the latter sense, it was necessary to go over in further depth the various points of consideration that had been revealed at previous MPMs. Also, it was important to examine not only the pros and cons of inflation targeting but also various issues related to enhancing the transparency of monetary policy for example, what was meant by price stability and whether to disclose the Banks forecasts of prices and the economy. This almost sounds as if the Board would examine technical issues in preparation for the introduction of inflation targeting to enhance transparency and commitment. However, there was a cautious remark by one member: First, it could pave the way for a policy that aimed at creating a certain level of inflation as hopes were strong that inflation would lighten the burden of debts. And second, the degree of the upward bias of price indexes changed as structural reform progressed. The member continued that it was preferable to enhance transparency by disclosing economic forecasts and thereby realize constructive dialogue with financial markets. What happened in the subsequent months was that this cautious persons view carried the meeting. From the spring to the summer of 2000, many members of the Board were busy debating whether and when the ZIRP would be ended, and no discussion on inflation targeting took place. The Board also carried out, or asked the staff to prepare, a study On price stability, which would be made public in October 2000. From this time, individual Board members would also issue personal forecasts for prices and economic activity. So it seems that a series of debates from mid 1999 to February 2000 resulted in more basic study, which would take more than six months, and alternative ways of achieving transparency. Effectively, the Board rejected the adoption of inflation targeting in 1999 and early 2000. On 9 March 2000, the Board decided to conduct a comprehensive review of the price stability. The Chairman (Governor) proposed that the staff conduct the study On price stability as follows: (1) The Banks staff would study the following issues taking account of the points discussed at MPMs: (a) the Banks basic thinking regarding price stability; (b) issues regarding price indices; (c) the evaluation of recent price developments in Japan; and (d) issues related to the numerical quantification of price stability (including setting a target and projecting the movement of a specific numerical indicator). (2) The Board would discuss price stability on the basis of the staffs report, and issue a comprehensive report on its thinking on price stability. Inflation Targeting and Japan: Why has the Bank of Japan not Adopted Inflation Targeting? 257 (3) During this process, the Bank could release information compiled by the staff that was appropriate for disclosure. (4) The Bank would issue a report...
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This note was uploaded on 05/12/2010 for the course COMMERCE finc at University of Sydney.