Toshiro Muto, former deputy governor of the Bank of Japan, said inflation targeting by the central bank would do little to end deflation, dismissing an effort by politicians to impose such a measure.
“There have recently been specific proposals to the central bank that it should adopt an inflation target to beat deflation,” Muto, 67, said at a forum in Tokyo on Friday. “I don’t think introducing an inflation target would stamp out deflation at all.”
Prime Minister Naoto Kan is facing pressure from within his party as well as rival lawmakers to make the BOJ target specific inflation levels. Consumer prices have fallen for 16 straight months, and a rising yen threatens to contribute to deflation by lowering import costs.
Kan said Monday that the BOJ and the government have been cooperating closely. Defeating deflation is crucial for reviving the economy and restoring fiscal health, the prime minister said in the Diet.
Muto also said that with the economy recovering moderately, the BOJ is unlikely to ease policy further any time soon. It will “naturally consider what it can do” if the global economy stagnates and the yen’s gains accelerate, he said.
Even so, there are few monetary policy measures that “can have an impact,” said Muto, who now heads the Daiwa Institute of Research. There is “little point” in guiding the benchmark interest rate to zero from the current 0.1 percent because short-term rates are already low, he said.
The yen on Monday traded near its highest level against the dollar since November on signs that the U.S. recovery is losing momentum. Muto said he doesn’t expect the currency to continue strengthening because interest-rate gaps between Japan and U.S. won’t continue to narrow.
The yen reached 85.95 per dollar Friday, the highest this year. The benchmark 10-year government bond yielded 1.055 percent, close to a seven-year low of 1.045 percent set July 22.
Muto said Japan’s yields have been declining because major banks “have no other choice” but to put their money into the debt market, rather than because of an improving outlook for curtailing the world’s largest public debt.
“It’s pretty difficult to explain why Japan’s government bond prices are rallying and yields are falling, with the country’s fiscal debt this bad,” said Muto, who worked at the Finance Ministry for 37 years before serving on the BOJ’s Policy Board for five years until March 2008.
Muto was the Liberal Democratic Party-led government’s first choice to succeed Toshihiko Fukui as BOJ governor in 2008, only to be rejected by the Democratic Party of Japan, which said his career at the Finance Ministry could hamper the bank’s independence.
With the DPJ now in power, a group of its Diet members led by Jin Matsubara last week urged Kan to push the BOJ to buy more government bonds and target inflation of 2 percent to 3 percent.
The BOJ’s policy options include operations to guide so-called term yields lower, like the credit program it adopted in December, Muto said. The lending facility, which the BOJ doubled to ¥20 trillion in March, provides commercial banks with three-month loans at 0.1 percent.
The BOJ could flood the banking system with cash if liquidity becomes scarce, and using communication to plot the path of interest rates is also an option, Muto said.
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