BoJ head defends new price goal, likens to Fed's target

Bank of Japan Governor Masaaki Shirakawa said on Friday its new price goal was similar to that of the Federal Reserve's inflation target, countering criticism that it is not making a bold enough commitment to revive the flagging economy. In a surprise move, the BoJ on Tuesday boosted asset purchases and set an inflation goal of 1 percent, pledging to maintain ultra-easy monetary policy until that price level is foreseen.
"If the Fed's monetary policy framework were to be described as inflation targeting, the BoJ's step is similar to that of the Fed," Shirakawa said in a speech at the Japan National Press Club.
While the BoJ's move was an indication of a more aggressive monetary policy to pull the ailing economy out of deflation, some market players and lawmakers criticised the "goal" as being too vague compared with the Fed's explicit 2 percent inflation target. Shirakawa defended the new price goal, saying it was not much different to the Fed's policy commitment or any other price targets set by central banks around the world. Federal Reserve Chairman Ben Bernanke himself has said the bank's long-term price goal was not an inflation target, but some pundits have described it as such, Shirakawa said.
The Fed last month set the 2 percent inflation target and extended its commitment to near-zero rates to at least late 2014, more than a year longer than its previous guidance. That has raised pressure on the BoJ to respond with an equally clear commitment to its ultra-easy policy. The BoJ thus decided on Tuesday to maintain ultra-low rates and keep buying assets to pump money into the economy until consumer inflation of 1 percent was foreseen. That means the BoJ will likely keep super-loose policy well into 2014, as it projects core consumer inflation of just 0.5 percent in the fiscal year ending in March 2014.
"Japan is moving toward an end to deflation. But it's still a long way for the country to foresee the 1 percent inflation deemed as our goal for the time being," Shirakawa said. "The BoJ will continue with powerful monetary easing with an eye on its medium- to long-term price goal," he said, signalling the bank's readiness to keep monetary conditions ultra-loose for a prolonged period.
Most central banks set inflation targets to anchor expectations and prevent prices from rising too quickly. In Japan's case, an inflation goal will act as an incentive to pursue more aggressive easing to stop prices from declining. Japan has been mired in more than a decade of deflation. Core consumer prices slid 0.3 percent last year as weak domestic demand prevents companies from passing on rising costs to consumers.
As a result, some academics and lawmakers have long argued that the BoJ should set a rigid "inflation target" and bind its monetary policy strictly to that target - something the central bank has resisted. Shirakawa said the BoJ avoided the term "inflation target" because it gives the impression it will tie its monetary policy automatically to a set price target.
Rather, the trend among central banks around the world is to offer a numerical indication of desirable price levels but not bind monetary policy to a short-term inflation target and focus more on long-term trends in prices and the economy, he said. The BoJ shares this approach, with the only major difference between the Fed is that while the US central bank sets a specific deadline for ultra-low rates, the BoJ sets conditions for when it will exit ultra-easy policy, Shirakawa said.
"When the outlook for the economy and prices is highly uncertain as is the case now for Japan, it's better to indicate what degree of inflation we want to achieve rather than specify the time of ending monetary easing," Shirakawa said. "That's a better way to restore trust in our pledge and enhance the effectiveness of our monetary policy," he said.
Shirakawa also countered criticism that its 1 percent inflation goal was too low, pointing out that Japan did not see inflation pick up to anywhere near 2 percent even during the asset bubble of the late 1980s. "If, for instance, we set an inflation goal of 2 percent and markets believe that and factor it in, long-term interest rates will rise as a result," Shirakawa said. "Setting (a price goal) that deviates from the real state of the economy would heighten uncertainty over the outlook and push up long-term rates," he said.