Japan should introduce an inflation target of around 2 percent to beat deflation, former economic and fiscal policy minister Heizo Takenaka said in a recent interview.
Although the target should be around 2 percent, Takenaka said, a range of 1 to 3 percent is desirable. He also called on the government and the Bank of Japan to conclude a policy accord to overcome deflation.
Some political parties, including the Liberal Democratic Party and Nippon Ishin No Kai (Japan Restoration Party), are calling for a government-BOJ policy accord and an inflation target in their campaign platforms for Sunday’s Lower House election.
Takenaka, who served as economic and fiscal policy minister from 2001 to 2005 under Prime Minister Junichiro Koizumi, said “shortages of demand in the economy” and “lack of money in circulation” are behind the long-standing deflation.
Takenaka said the BOJ’s responsibility for the current economic slump is “very grave” because the bank ended its quantitative easing policy in March 2006. The government is also to blame because it helped lower the economy’s growth potential by not forging ahead with structural reforms, he said.
Takenaka, now a professor at Keio University and chief of the university’s Global Security Research Institute, stressed that the government and the BOJ can show their true determination to end deflation by concluding a policy accord. That in turn, he said, could boost expectations among the public and markets and lead to economic growth.
He said the government should undertake structural reforms to raise real gross domestic product growth to 1.5 to 2.0 percent, and that the BOJ needs to step up monetary easing so the money supply can grow by around 5 percent.
Takenaka sounded negative about the BOJ’s current 1 percent inflation goal, saying that it is “equivalent to tolerating zero percent growth.”
The BOJ’s monetary easing measures should be “simple and orthodox,” Takenaka said.