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Unformatted text preview: was changed when the inflation rate was expected to deviate from the target. From the viewpoint of inflation-targeting advocates, these measures, including deciding on the price index to measure inflation, mentioning the number zero, and taking actions on quantitative easing, were more than a half-step towards fully-fledged inflation targeting. It is quite puzzling to the advocates of inflation targeting why the Board members still had to deny the resemblance of the new policy to inflation targeting. If one wants commitment, inflation targeting is the better way. Perhaps target was a word that was disliked by the Board members, as it would make the Board accountable for the consequences of its actions. At the 19 March 2002 meeting, an advocate of inflation targeting proposed that the numerical target should be made in consultation with the government: [O]ne member said that it was not appropriate to introduce a numerical target with a specific time frame without having any concrete means to achieve the target, but it would be meaningful if the Bank shared a numerical target for prices with the Government in some way as a policy framework. In response to this, one member said that in setting a numerical target with the Government, the Governments policy commitment in achieving the target would be another important factor, but there could be a contradiction in the current deflationary situation between implementing fiscal consolidation and setting an inflation target. From the fall of 2002 to the beginning of 2003, an interest in inflation targeting re-emerged. The Board had two intensive discussions, on 10 October 2002 and 21 January 2003. During this time, discussions on inflation targeting were also gathering pace outside the Bank of Japan, as the end of the terms of Governor Hayami and the two Deputy Governors were approaching, and interest was raised in whom the government would appoint as replacements. The Bank felt defensive at first, but subsequently presented arguments to convince the public about the correctness of the policy. They emphasised the importance of explaining what they had been doing in one of the MPMs.47 In the MPM of 10 October 2002, several negative opinions on adopting inflation targeting were mentioned. Inflation targeting was characterised by some members as inappropriate because it has negative effects on the economy and the financial system, such as damage to the credibility of economic policy and to financial markets, [which] would exceed the positive effects. The implication seems to be that inflation helps debtors. Another member commented that, given that quantitative easing did not stop prices declining, and as more negative shocks were expected from an accelerated resolution of the problems of non-performing loans, inflation targeting was not appropriate due to a lack of instruments to achieve the target.
47. In connection with the critics call for taking more drastic policy, the Board member remarked that it was vital to explain the risks and the possible side effects of individual policy tools as concretely as possible, in order to gain greater public understanding of the Banks conduct of monetary policy (21 January 2003). Inflation Targeting and Japan: Why has the Bank of Japan not Adopted Inflation Targeting? 261 Members who commented on inflation targeting expressed the view that if inflation targeting were to be adopted in the current economic situation, the mechanism to achieve the target would rely mostly on an upward shift in inflationary expectations, unless public expenditures were substantially increased. These members then said that it was theoretically not possible to shift inflationary expectations upward unless there were sufficient and credible policy tools and transmission mechanisms to achieve the target, and that setting a target in the absence of such tools and mechanisms would impair public confidence in economic policy as a whole. This summarises the negative opinion at the time quite well. Concern about the implications for the long-term bond rate was also expressed: if inflationary expectations were to shift upward, it was the bond markets that would be most likely to be affected.48 One member countered that effects of a rise in long-term interest rates on banks balance sheets ... might be smaller than expected ... because banks had been controlling risks.49 It is interesting that some members suggested that the Bank was essentially running an inflation-targeting policy without saying so.
[t]he Banks current monetary easing was already aimed at incorporating the advantages of inflation targeting, given the monetary policy measures the Bank could adopt in the current situation ... One of these members said that the Bank had already adopted inflation targeting policy in a broad sense, in that it made a commitment to continue the quantitative easing measure until the consumer price index registered stably zero percent or an increase year on year. On this basis, this member pointed out that the difference between the Banks current easing policy and i...
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This note was uploaded on 05/12/2010 for the course COMMERCE finc at University of Sydney.