Prime Minister Junichiro Koizumi expressed caution Tuesday about the Bank of Japan adopting an inflation target to fight deflation at a two-day policy meeting that began the same day.

“I agreed with a proposal” that the government should carefully study the possibility of setting an inflation target because it may cause negative “side effects” on the economy such as a plunge in government bond prices, Koizumi told reporters.

Koizumi said the proposal was laid out earlier in the day by former Prime Minister Kiichi Miyazawa, who also served as finance minister in the Cabinet of the late Prime Minister Keizo Obuchi. Koizumi said he responded to Miyazawa by saying, “I understand (the dangers) well.”

Koizumi’s economic ministers and a leading business figure were also reluctant about a possible inflation target.

“It may be one means, but we have no experience of exercising inflation targeting at a time of deflation,” Economy, Trade and Industry Minister Takeo Hiranuma said. “We need to discuss it carefully as we cannot rule out the possibility that it could lead to hyperinflation.”

At a separate press conference, Finance Minister Masajuro Shiokawa defended the BOJ’s efforts to combat deflation.

Asked his position on whether the BOJ should adopt an inflation target, Shiokawa said the central bank was already taking steps to fight the persistent price falls weighing on the economy, and that the question of introducing a formal target is “a matter of nuance.”

The BOJ has resisted political pressure to set an inflation target, which would aim for a specific level of consumer prices within a given period.

Among business leaders, Yotaro Kobayashi, chairman of the Japan Association of Corporate Executives, told reporters that inflation targeting by Japan alone would be “hardly effective because prices are falling in response to major global changes” such as an accelerating increase in cheap exports from China.

With regard to growing calls for the successor to BOJ Gov. Masaru Hayami to adopt an inflation target, Kobayashi said it is undesirable to make such a demand as a way of screening potential candidates.

Hayami’s five-year term expires in March.

On the other hand, Masashi Teranishi, chairman of the Japanese Bankers Association, said the BOJ should consider adopting an inflation target.

“There is a need for the Bank of Japan to promote discussions (on antideflation policies) without exception,” said Teranishi, who is also president of UFJ Bank.

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