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Academic close to Kuroda calls for ‘flexible inflation target’

By on June 22, 2021 0

TOKYO (Reuters) – The Bank of Japan must relax its inflation target so that it can take into account not only price growth but also the output gap and job creation when deciding monetary policy , said an academic close to BOJ governor Haruhiko Kuroda.

FILE PHOTO: Bank of Japan Governor Haruhiko Kuroda speaks at a press conference in Tokyo, Japan on December 19, 2019. REUTERS / Kim Kyung-Hoon / File Photo

The BOJ has a traditional inflation target, which means that it primarily focuses on price stability when deciding interest rates, unlike some other major central banks such as the Federal Reserve, which has adopted a dual mandate targeting inflation and employment.

Takatoshi Ito and Kuroda, who have been close since working together at the Japanese Ministry of Finance in 1999-2001, pushed for the 2% inflation target to lift Japan out of deflation in 1999, and start 2013, the BoJ officially adopted this target.

Since then, the central bank, under Kuroda, has also rolled out a massive stimulus package that has so far failed to revive inflation, which remains around zero percent.

“It is unfortunate (that) the 2% inflation target was not met (…) but you cannot consider it a failure,” said Ito, who worked as an MP for Kuroda in 1999-2001, when the governor was Deputy Minister of Finance. international affairs.

“We experts call it ‘flexible inflation target’ in a sense that inflation alone is not a single measure of success,” he said. “Achieving full employment with an improvement in the output gap is so much better than negative economic growth below 2% inflation.”

The comments add to a growing chorus of experts calling for more flexibility in Japan’s monetary policy as global policymakers seek to balance the need to jumpstart growth with the rising cost of protracted stimulus measures, such as the blow to bank profits from years of ultra-low interest rates.

Ito, a Columbia University professor, said the BOJ is unlikely to increase purchases of Japanese government bonds and exchange-traded funds (ETFs) because it is already reducing its massive bond purchases account given their mitigating effects on the real economy.

He said it would take a year or more after inflation hits 2% for the central bank to raise interest rates – a prospect that is “far on the horizon.”

Monetary easing has not reached its limit, but it is becoming increasingly difficult to guide such a policy given the side effects of prolonged easing such as a blow to bank profits, he said. .

The BOJ stuck to its massive stimulus measures on Friday, but unveiled a plan to increase funding for the fight against climate change, joining a global push to address its economic and financial fallout. .

“It was appropriate,” Ito said. “But the question is implementation because it’s hard to draw a line as to what is green.”

Reporting by Tetsushi Kajimoto and Kaori Kaneko; Editing by Ana Nicolaci da Costa