Nov. 26 (Bloomberg) -- The U.S. Federal Reserve has shifted its monetary policy toward flooding the economy with cash and away from targeting interest-rate levels, said Kazumasa Iwata, former deputy governor of the Bank of Japan.

“The Fed is already adopting quantitative easing, considering the federal funds rate is close to zero percent,” Iwata, who now heads a research institute that advises the Cabinet Office, said in a speech in Tokyo today. “The policy was effective for Japan as it directly provided liquidity and eased concern in markets.”

The Bank of Japan kept interest rates close to zero from 2001 to 2006 and flooded the financial system with cash to combat deflation. Iwata, who served on the policy board for five years until March, said the U.S. situation differs because it still has relatively high inflation and the benchmark rate is 1 percent.

The Fed yesterday announced it will commit up to $800 billion to unfreeze credit for homebuyers, consumers and small businesses. Unlike the Bank of Japan in the first half of the decade, the U.S. central bank said its objective is to buttress credit markets rather than ramp up money to stamp out deflation.

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

Last Updated: November 26, 2008 02:00 EST