Daily Archives: February 16, 2012

Fifteen years ago, a little-known tragedy hit the Bank of Japan. In the mid 1990s – or during the early stages of Japan’s banking crisis – BoJ officials decided to use some of the central bank’s own yen to prop up a failing finance company, in a desperate effort to paper over problems and buy time.

But the company went bust, and the money was lost, creating a hole in the BoJ balance sheet for the first time since the second world war. Haunted by shame, the senior official in charge committed suicide, in a move that has left scars on the collective psyche of central banks’ leadership that last, even today.

 

Claire Jones

Sir Mervyn King has in the past been of the sort of central banker that has, at every opportunity, extolled the virtues of inflation targeting.

So comments at yesterday’s Inflation Report press conference, where the governor conceded that the Bank of England’s monetary policy framework has its deficiencies, were something of a surprise. Here’s what he said:

“I do think the experience of the last four to five years has raised some question marks about what inflation targeting can hope to achieve and whether it’s sufficient. I think our feeling now is, on its own, it’s not sufficient, it did not prevent the build up of a large degree of financial instability. And there is I think a debate to be had about whether other instruments are the right way to deal with that, through our Financial Policy Committee, or whether monetary policy should take other considerations into account.”

Could this be the beginning of the end for the Bank of England’s inflation target, at least in its current guise?

It’s far too early to say. Besides, with the governor due to depart mid-way through next year, whether or not the Bank alters its monetary policy framework will largely depend on the views of Sir Mervyn’s successor.

However, his calls for a debate could prove significant.