Inflation Target Won't Work, Former Bank of Japan Deputy Chief Muto Says
Former Bank of Japan Deputy Governor Toshiro Muto said inflation targeting by the central bank would do little to end deflation in the world’s second-largest economy, 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 hosted by Bloomberg News in Tokyo on July 30. “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 central bank 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 today that the central bank and the government have been cooperating closely. Defeating deflation is crucial for reviving the economy and restoring fiscal health, the prime minister said in parliament.
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 in Tokyo. There is “little point” in guiding the benchmark interest rate to zero from the current 0.1 percent because Japan’s short-term rates are already low, he said.
Rising Yen
The yen today 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.
Japan’s currency was at 86.70 per dollar at 10 a.m. in Tokyo after reaching 85.95 on July 30, 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 central bank’s policy board for five years until March 2008.
Rejected by DPJ
Muto was the Liberal Democratic Party-led government’s first choice to succeed Toshihiko Fukui as governor in 2008, only to be rejected by the opposition Democratic Party of Japan, which said his career at the Finance Ministry may hamper the bank’s independence.
The DPJ became the government last September, and a group of its legislators led by Jin Matsubara last week urged Prime Minister Kan to push the Bank of Japan to buy more government bonds and target inflation of 2 percent to 3 percent. Your Party, an opposition group that may work with the government after it lost an upper-house election, wants the bank to set an inflation target of around 2 percent.
Because neither of the two largest parties, the DPJ and the Liberal Democratic Party, has endorsed the Your Party proposal, there’s “little chance of this legislation passing,” Goldman Sachs Group Inc. economists wrote in note today.
BOJ Options
The Bank of Japan’s policy options include operations to guide so-called term yields lower, like the credit program it adopted last December, Muto said. The lending facility, which the bank doubled to 20 trillion yen ($230 billion) 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.
He said consumer prices excluding fresh food and volatile items such as energy and telecommunication fees will probably stop falling in mid-2011 at the earliest. “That means it’s hard to anticipate that Japan’s monetary policy will head toward exit within a year.”
Prices excluding fresh food slid 1 percent in June from a year earlier, the 16th consecutive decline, the government said last week. The BOJ policy board considers prices to be stable if they’re rising at a pace of up to 2 percent; the estimate isn’t a binding target.
To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net
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