Koizumi's Now You See Me, Now You Don't On Inflation Targeting

Japan watching can be a very frustrating business for economists. Last year we had economy minister Takenaka prjecting himself as a hard-landing specialist to sort out once-and-for-all the country's non performing loan problem. Then everything went quiet and we are still waiting to see whether the current round of inspections will prove effective or not. Now it's the turn of the Bank of Japan to draw the headlines. World opinion has it that the new governor should be an 'inflation targeter'. Now leaving aside the fact that, as dedicated followers of this blog know, my opinion is that Japan's deflation problem could prove much more intractable than the now popular 'inflation targeting' mantra assumes, it seems the Japanese themselves are not really buying it. Or at least this could be the interpretation to put on Koizumi's latest comments on the topic. Speaking to a parliamentary budget committee, he said: "A target of merely achieving higher prices is not desirable." A new BoJ governor will be appointed for a five-year term from March 19, and this has triggered a great deal of speculation that Japan may be about to embark on a more aggressive monetary policy. The prime minister himself had stoked such speculation at the end of last year by saying the battle against deflation, now in its fourth year, was the most important challenge of 2003. He also allowed several close colleagues to talk openly about the benefits of an inflation target, a policy strongly opposed by the BoJ. Now it seems that opponents of this policy (or opinion polls) are having more success in winning Koizumi's ear. Of course, this oposition to provoked inflation political could be far more political than economic, in a country where there are a lot of old people (and hence votes), and where many of these have savings which would be devalued by any inflationary process.

However yesterday, Mr Koizumi said that unless higher prices were accompanied by increased economic activity, it would erode living standards. "If salary levels stayed the same and only prices rose, there would be side effects. That is why I am pursuing economic reform to reinvigorate the economy." The LDP is also thought to be concerned that an aggressive inflation policy would be electorally unpopular, since it would erode the savings of many retired Japanese on fixed incomes who are benefiting from deflation.The prime minister's comments are the clearest indication yet that he is not keen to appoint an aggressive inflation-fighter as BoJ governor. When the name of Nobuyuki Nakahara, who advocates an inflation target, was floated, Mr Koizumi received a flurry of e-mails and faxes claiming Mr Nakahara was unsuitable for the job. Several BoJ officials have said privately that Mr Nakahara, or a similar candidate, would have difficulty in leading the central bank, since the six remaining members of the board are suspicious of an inflation-or-bust policy. Of the nine-member board, the governor and two deputy governors come up for re-election in March. Minutes of the December policy board meeting, released this week, show that all but one of the existing board are opposed to an inflation target, which would set a specific goal for price rises within a specified time.
Source: Financial Times
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