Bank of Japan Gov. Masaaki Shirakawa said monetary policy conducted to address immediate inflation trends can cause bubbles and central banks need to make decisions bearing in mind their long-term effects.
"If a central bank maintains a low interest rate environment with too much focus on the near-term inflation outlook, this could consequently encourage the formation of financial bubbles," Shirakawa said Monday in Holland, according to remarks published Tuesday on the BOJ's website.
Policymakers "should pursue price stability through the conduct of monetary policy with a sufficiently long time horizon," he said.
The Bank for International Settlements warned Sunday that central banks may have to raise rates to control inflation at a faster pace than in the past. Borrowing costs in the world's largest developed nations are near record lows as the central banks in the U.S. and Japan have pledged to keep accommodative policies to support their economies.
Imbalances created during credit bubbles ranging from asset-price inflation to increased leveraging are in part driven by expectations that interest rates will remain low for a long time, Shirakawa said.