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Unformatted text preview: were under the control not of the Bank but the Ministry of Finance. These members also contended that, if Japan were to prioritise realising a positive inflation rate with a certain time limit, it would be essential for the Government to give a concrete outline of how it would conduct fiscal and foreign exchange policy to achieve it (21 January 2003). Inflation Targeting and Japan: Why has the Bank of Japan not Adopted Inflation Targeting? 263 overseas: [T]he view that inflationary expectations would be shifted upward merely by a central banks announcement of inflation targeting was becoming a minority opinion overseas. Moreover, the view that the remaining measures that could be employed by the Bank alone were ones whose effects were uncertain seemed to have become the majority view overseas. These members pointed out that the risks and side effects of individual policy tools had not been sufficiently understood, and this lack of understanding was behind the persisting view that the Bank should try adopting any policy tool, if the possible side effects could be considered small, even though its effectiveness might be uncertain. Moreover, in response to the suggestion by critics that the Banks policy of purchasing risky assets would be harmful: one member said that there was an extreme view that the Bank should purchase not only [Japanese Government bonds] JGBs and foreign bonds but also risky assets that were securitised such as stocks and real estate without limit until prices rose. However, if the Bank actually implemented such a policy, it would be likely to cause many side effects, such as a loss of fiscal discipline, a deterioration of the central banks assets, and a rise in long-term interest rates, and would therefore negatively impact the economy before the inflation rate rose. Some Board members criticised inflation targeting because it would destabilise the market: One member noted that inflation targeting was basically aimed at stabilizing peoples expectations. However, the mechanism of an upward shift in inflationary expectations currently envisioned by advocates of inflation targeting was highly likely to destabilize peoples expectations, and this could in turn destabilize longterm interest rates and the economy. This was because, as most people still expected that it would take time to overcome deflation, some would start to anticipate that to achieve the target the authorities would employ extreme means that could damage the publics confidence in them. This argument is difficult to understand, because if inflation targeting is credible, it would certainly stabilise expectations. To endorse peoples expectations that it would take a long time to overcome deflation to not rock the boat sounds like a strategy not to fight deflation. Then, without inflation targeting, how would deflation be overcome? Many Board members remarked that deflation would be overcome when the economy got back on the path of sustainable growth, but how to achieve growth was not particularly well answered.51 They basically reaffirmed that there is little that monetary policy can do. 51. One member emphasized that the measures to overcome deflation were not ones designed to create inflation, but ones that would realize sound economic growth ... overcoming deflation could only come into prospect when the economy realized sustainable growth. The member continued that the authorities should present credible policies to deal with the fundamental cause of the price falls, namely the lack of demand and the stagnation of the economy ... two factors were causing the decline in economic growth in Japan, namely, the weakness in aggregate demand and the delay in overcoming structural problems of the economy ... fiscal policy could still have a great impact in revitalizing the Japanese economy, and the efficiency of fiscal spending would significantly affect the direction of the economy. 264 Takatoshi Ito References
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