Bank of Japan Gov. Masaru Hayami said Thursday that the central bank will continue to study inflation targeting but that it has qualms about achieving price levels at the expense of prudence.

Hayami made his case in a written reply to a group of Liberal Democratic party members who are calling for a legal revision that would obligate the BOJ to commit to a certain inflation rate and take all necessary steps to achieve it. Under consideration is a clause that would allow the Diet to strip the governor of his post if the target is not met.

“We consider inflation targeting a means to heighten transparency of monetary policy and a subject that warrants further study,” Hayami said in the statement.

His qualms were not aimed at inflation targeting per se, he said. “I said (to reporters) we would never adopt an ‘inflation adjustment’ policy where we would do anything to meet an inflation target that is set at high levels,” he said.

The war of words is the latest episode in a three-year debate between the government, the BOJ and private-sector economists about whether inflation targeting is a viable option for Japan.

The group of LDP members, led by Kozo Yamamoto, a House of Representatives lawmaker, has asked Hayami to hold an open debate with them on monetary policy, arguing that the central bank’s latest monetary easing move is far from sufficient to help the deflating Japanese economy recover.

At the Aug. 14 policy board meeting, the BOJ decided to raise financial institutions’ cash reserves at the BOJ by 1 trillion yen to strengthen its quantitative easing regime, introduced in March.

The hike means the banks will have 6 trillion yen in reserves at the BOJ.

To help attain the new target, the BOJ also decided to increase the amount of outstanding government bonds it buys outright through its money market operations to 600 billion yen a month from 400 billion yen.

“Deflation is keeping real interest rates from falling. If the BOJ sets an inflation rate target at 2 percent, while keeping short-term nominal rates at zero, this will push short-term real interest rates down to minus 2 percent,” Yamamoto said at a recent news conference.

Not only would this cut the real value of both the government’s fiscal debt and that of banks, but demand would rise, he said.

“Companies are not borrowing and people are not buying because they think prices will fall if they wait,” Yamamoto opined. “If the BOJ commits to an inflation target, people will borrow now and demand for loans will rise.”

Other proponents claim an inflation target would make the BOJ more accountable to price stability.

But Hayami says the central bank has done its best to fulfill its obligation to the public. “As head of the central bank, I have spoken before the Diet at a frequency unheard of among other industrialized nations and have worked hard to fulfill my accountability to the Diet.”

Inflation targeting also smacks of debt monetization and puts into further doubt the central bank’s credibility as an independent institution working in the interests of the economy, BOJ officials say.

Forcibly creating inflation means the central bank will need to buy either domestic or overseas assets, such as government bonds or foreign currency.

This would weaken the yen, a move that is sure to irk other Asian nations that compete with Japan in export markets.

In addition, it is difficult to put forward a number that defines price stability over long periods of time, Hayami has argued.

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