The Bank of Japan on Feb. 14 announced that it would adopt a “price stability goal” of 1 percent for the time being — a virtual introduction of an explicit inflation target of 1 percent. The central bank also decided to increase its financial asset purchase program by ¥10 trillion, raising its total to ¥65 trillion, and to keep the key interest rate at a level between zero and 0.1 percent.

The BOJ should be praised for showing its determination to help end the Japanese economy’s persistent deflation. It is hoped that the central bank and the government will mobilize their available tools to end the nation’s economic stagnation.

Up to now the BOJ had shunned adopting an inflation target. A strong factor behind the BOJ’s decision was the U.S. Federal Reserve’s decision in late January to adopt a 2 percent inflation target and to extend a zero-interest-rate policy through the end of 2014 instead of mid-2013 as had been previously decided. Following the Fed’s decision, a call for the BOJ to adopt a inflation target had grown among the ruling and opposition parties.

Before its latest decision, the BOJ set a rise of around 1 percent in the consumer price index as a loose policy target. But this goal did not necessarily represented the unified judgment of the BOJ policy board members. The decision to adopt a clear inflation target represents a step forward from the BOJ’s traditional stance and will serve as a powerful message to the public and business enterprises.

It is believed that the Japanese economy descended into a state of deflation around 1998. A constant decrease in the prices of goods and services reduces business enterprises’ profits, which in turn leads to a decline in capital investment, falling wages, rising unemployment and an increase in bankruptcies. Japan’s real gross domestic product in 2011 fell by 0.9 percent from 2010, although this may in part reflect the impact of the March 11 disasters.

The BOJ’s monetary policy alone will not end deflation because it is also caused by a variety of factors including stagnant domestic demand, cheap imported goods and price drops due to technological progress. Therefore it is all the more important that the government also develop policies to nurture industries that can develop an attractive array of new products and services that can fuel domestic demand.

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