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Staff writer With little room left for government spending to stimulate the fragile economy, political pressure on the Bank of Japan is rising. The Liberal Democratic Party’s panel on financial affairs decided Thursday to launch a working team next week to study whether the BOJ should adopt inflation targeting, a controversial policy in which monetary policy is manipulated to achieve a desired rate of inflation. The panel will even consider possible changes to the BOJ Law or the Fiscal Law, said Hideyuki Aizawa, head of the panel. Proponents say setting an inflation target, for example at a range from 1 percent to 3 percent, would counteract the deflationary pressure currently facing Japan and, they say, stimulate consumption and investment spending. Inflation targeting of a different sort has been adopted by several industrialized countries, including Britain, Canada and Australia; the targets in these countries are meant to prevent excessive inflation, not stop deflation. But opponents, including BOJ officials, say it would be difficult to stop inflation within the target range, and market expectations for rising inflation would trigger a dangerous surge in long-term interest rates. While the Finance Ministry is officially mum on the issue — vice Minister Nobuaki Usui said Thursday the issue is in the BOJ’s jurisdiction — Takatoshi Ito, a prominent economist and deputy vice finance minister for international affairs, called for inflation targeting in an article published in October, albeit from a personal stand. The BOJ is not inexperienced with political pressure, which persists even since the revised BOJ Law gave it some independence in April 1998. In early 1999, calls were rising for the BOJ to buy newly issued government bonds to curb a surge in long-term interest rates, an action prohibited in principle by the Fiscal Law. The bank has rejected the idea, saying it would allow rampant fiscal spending and lead to hyperinflation. Then last fall, politicians demanded the bank ease its monetary policy further to stop the yen’s appreciation against the dollar, though the BOJ insisted it was already providing sufficient liquidity in the money market. And now, the LDP’s Aizawa said he personally doubts there is any effective tool of fiscal policy available if the economy does not pick up. Therefore, he is eyeing the BOJ’s monetary policy. Given the swollen government deficit and its massive debt, the proposed 85 trillion yen fiscal 2000 budget may be the final huge expenditure, as Finance Minister Kiichi Miyazawa stresses it will be. Aizawa knows that there are opponents to inflation targeting inside the LDP, and there must be others among its coalition partners. But one should not underestimate what Aizawa, a one-time vice finance minister, and his counterparts in the Liberal Party and New Komeito are capable of doing. He is one of the minority politicians in the ruling coalition who were calling to postpone the end of full governmental protection of bank deposits, considered a key banking reform. These politicians somehow got what they wanted in a surprising agreement in December, which was widely seen as backtracking on Japan’s financial reform efforts. Aizawa also has been calling for another radical change — a redenomination of the yen so 100 yen would be counted as 1 yen. For now, however, his sights are on inflation targeting.

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