Former BOJ deputy governor calls for minimum inflation target of 1.5%

JIJI

An inflation target of 1.5 percent or higher should be introduced, according to former Bank of Japan Deputy Gov. Kazumasa Iwata.

Iwata, current president of the Japan Center for Economic Research, also called for stepped-up cooperation between the government and the BOJ in fighting deflation, saying their current joint efforts are insufficient.

At present, the central bank is aiming for year-on-year growth of 1 percent in the country’s core consumer price index. The Liberal Democratic Party, however, is calling on the BOJ to set the inflation goat at 2 percent.

Pointing out that the risk of deflation will increase if the CPI growth falls below 1 percent, Iwata said an inflation target should be set at a higher level.

He also argued that the CPI has an “upward bias,” noting figures shown in the data tend to be higher than actual prices of goods and services.

The margin of the bias is considered to be “at least 0.5 percent or maybe more,” he said.

If the bias is 1 percent, the country’s inflation target needs to be set at 2 percent,” he said. “If the bias is 0.5 percent, the target should be 1.5 percent,” he added.

How much the CPI upward bias is needs to be studied by experts, he said adding the impact on foreign exchange rates should also be taken into account in choosing an appropriate inflation target.

Many advanced countries with inflation targeting systems have set their targets at 2 percent, Iwata said. The yen “would always be under upward pressure” if Japan adopts an inflation target below that level.

Iwata said a joint statement issued in late October by the government and the BOJ to outline their resolve and measures to beat deflation and promote structural reforms was insufficient.

Iwata called on the Finance Ministry and the BOJ to jointly establish a fund to prevent financial crises.

Using ¥50 trillion to be provided by the central bank, the fund should buy bonds issued by the European Stability Mechanism, a body set up recently to tackle the region’s debt crisis. The crisis is considered to be the source of the yen’s stubborn appreciation.

Iwata served as BOJ deputy governor for five years from March 2003 after working at the Cabinet Office in the area of economic assessment and policy analysis. He was also professor at the University of Tokyo and worked for the former Economic Planning Agency, now part of the Cabinet Office.