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The Bank of Japan Policy Board discussed the theory of inflation-targeting at its meeting Dec. 16-17, with several members agreeing it would be an inappropriate policy lever to pull in an attempt to overcome deflation, according to minutes of the meeting released Monday.

“One member expressed the view that adopting inflation-targeting would be reckless and inappropriate,” the minutes state.

Several panel members said it would be difficult to boost expectations of inflation merely by announcing an inflation target without sufficient and credible policy tools, according to the minutes.

“Many other members . . . said that, even if a price target were set, the bank would not be able to achieve it alone. A few of these members remarked that prices could increase if the government drastically expanded fiscal spending and implemented tax cuts to narrow the output gap, but such policies had not been and should not be adopted in the current situation,” the minutes state.

Another member remarked that inflation-targeting could only be adopted on the basis of shared responsibility between the government and the central bank:

“The bank and the government could agree that setting a specific inflation rate would be appropriate, if the government made an explicit commitment to maintain continuous fiscal discipline and if the bank’s flexibility and freedom in conducting monetary policy without setting a specific time frame for achieving the inflation rate were guaranteed.”

A Finance Ministry representative who attended the meeting as an observer urged the central bank to increase its monthly outright purchases of government bonds to 2 trillion yen from 1.2 trillion yen and to consider removing the BOJ’s limit on government bond holdings on a temporary basis, according to the minutes.

While the Policy Board voted against adopting these proposals, one board member said that the BOJ should reconsider the role of outright purchases of government bonds within its monetary policy framework and the rule that limits its bond holdings, the minutes state.

The member reportedly added, however, that if the ceiling on the BOJ’s holdings of government bonds were to be removed, an agreement would have to be reached between the BOJ and the government to secure fiscal discipline and the financial soundness of the central bank.

During the meeting, the ministry representative also called on the BOJ to consider not sterilizing foreign exchange intervention, the minutes state.

“Unsterilized foreign exchange intervention would result in an increase in the outstanding balance of current accounts held at the bank, and thus the government would like the bank to incorporate such an increase in the contingency clause in the guideline for money market operations,” the Finance Ministry official was quoted as saying.

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