Robin Harding The byproduct of inflation targets in Japan

A little more interest from the back-and-forth about deflation that regularly attends hearings of the finance committee of Japan’s lower house. According to Bloomberg/BusinessWeek:

“I think inflation targeting is an attractive policy,” [finance minister Naoto Kan] said at parliament in Tokyo today. “We could have a goal of 1 percent or something a little higher, like 2 percent, and work with the BOJ until that goal is met.”

That takes Mr Kan a little closer to substantive disagreement with the BOJ. The BOJ is (a) opposed to an explicit inflation target and (b) happy with its existing ‘understanding of price stability’ of a 0-2 per cent positive range centred on 1 per cent.

Indeed, BOJ governor Masaaki Shirakawa was moved to put half of the Bank’s case against an inflation target. Via Reuters:

“We’re at a stage where some are having second thoughts about inflation targeting,” BOJ Governor Masaaki Shirakawa said in the lower house financial affairs committee.

“When the global economy was growing well in the 2000s, people focused too much on short-term prices. This led to an excessively long period of low rates, which created excess credit and led to increased leverage. When this was unwound, it had a big economic impact.”

BOJ board members’ understanding of long-term price stability centre on a 1 percent rise in consumer prices. That is better than an inflation target, because the bank is not easily swayed by short-term price fluctuations, Shirakawa said.

The unstated part is more important, though: the BOJ knows that, with its current policy mix, an inflation target will not be credible. If an inflation target is imposed, the BOJ will either have to set and defend a policy that it knows will not achieve its mandate, or it will have to use unconventional policy that it judges (wrongly in my view) to have intolerable macroeconomic risks.

On its own, setting an inflation target will do nothing to end Japan’s deflation – but if it leads to a serious debate about policies that might actually do that then it can only be a good thing.