Japanese central bank sets 2% inflation target
Source: Agencies |
January 23, 2013, Wednesday
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Print Edition
Print Edition
JAPAN'S Prime Minister Shinzo Abe declared a "monetary regime change" yesterday as the central bank bowed to government pressure, setting a 2 percent inflation target aimed at helping the country emerge from its prolonged bout of deflation.
"This opens a passageway toward bold monetary easing," Abe said after the Bank of Japan and government jointly announced the inflation target and plans for "open-ended" central bank asset purchases similar to the strategy followed by the US Federal Reserve to keep market interest rates low.
However, there was a caveat: The BOJ's new asset purchases won't start for a year. The yen strengthened against the US dollar after the announcement though it is much weaker than it was before Abe's Liberal Democratic Party won the national election last month.
Abe began lobbying the central bank to ease monetary policy even before he took office in late December, saying more aggressive action was needed for the world's No. 3 economy to escape from years of falling prices that can dull consumer spending and business investment.
His campaign to influence the ostensibly independent central bank has met with criticism at home and abroad. Ahead of the BOJ's policy announcement, the president of Germany's independent central bank, the Bundesbank, cited the Japanese government's pressure as an example of "alarming encroachments" on central banks' independence.
Bank of Japan Governor Masaaki Shirakawa vowed to achieve the inflation benchmark "as soon as possible," in cooperation with the government. Some economists believe a moderate amount of inflation acts like grease and can make the wheels of the economy spin faster.
Whether the effort will succeed remains to be seen: the central bank has not achieved even its 1 percent inflation target, with price increases hovering below 0.5 percent for the past two years despite surges in energy costs.
The higher inflation target "would also have to be backed up by substantial policy measures to achieve it, otherwise the Bank of Japan might simply end up missing an inflation target of 2 percent rather than, at present, missing one of 1 percent," Capital Economics said.
Abe wants fast results before an election for the upper house of Japan's parliament in July. His government is seeking to spur growth both through heavy government spending on public works and other projects and through monetary easing.
"This opens a passageway toward bold monetary easing," Abe said after the Bank of Japan and government jointly announced the inflation target and plans for "open-ended" central bank asset purchases similar to the strategy followed by the US Federal Reserve to keep market interest rates low.
However, there was a caveat: The BOJ's new asset purchases won't start for a year. The yen strengthened against the US dollar after the announcement though it is much weaker than it was before Abe's Liberal Democratic Party won the national election last month.
Abe began lobbying the central bank to ease monetary policy even before he took office in late December, saying more aggressive action was needed for the world's No. 3 economy to escape from years of falling prices that can dull consumer spending and business investment.
His campaign to influence the ostensibly independent central bank has met with criticism at home and abroad. Ahead of the BOJ's policy announcement, the president of Germany's independent central bank, the Bundesbank, cited the Japanese government's pressure as an example of "alarming encroachments" on central banks' independence.
Bank of Japan Governor Masaaki Shirakawa vowed to achieve the inflation benchmark "as soon as possible," in cooperation with the government. Some economists believe a moderate amount of inflation acts like grease and can make the wheels of the economy spin faster.
Whether the effort will succeed remains to be seen: the central bank has not achieved even its 1 percent inflation target, with price increases hovering below 0.5 percent for the past two years despite surges in energy costs.
The higher inflation target "would also have to be backed up by substantial policy measures to achieve it, otherwise the Bank of Japan might simply end up missing an inflation target of 2 percent rather than, at present, missing one of 1 percent," Capital Economics said.
Abe wants fast results before an election for the upper house of Japan's parliament in July. His government is seeking to spur growth both through heavy government spending on public works and other projects and through monetary easing.
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