TOKYO (MNI) – Bank of Japan Governor Masaaki Shirakawa said on Tuesday that
targeting 3% annual inflation would be “unrealistic” in Japan where the average
year-on-year rise in consumer prices in the past few decades has been lower than
in other advanced economies.

Repeating his warning, he also told reporters that financing of fiscal
needs by central banks through underwriting of government debt would cause an
unwanted rise in long-term interest rates, pushing up borrowing costs.

Joint efforts by the BOJ to continue monetary easing and the government to
implement deregulation will help boost Japan’s economic growth potential,
Shirakawa told reporters after the BOJ’s two-day policy meeting.

If the economy regains vitality, “the possibility will also rise that the
rate of increase in CPI will go above 1%,” he said.

But for the time being the BOJ’s interim target is to seek 1% inflation —
below 2% and clearly above zero, he added.

“It is important for the BOJ to conduct bold monetary easing and we are
aware of it, and we review a desirable price goal once a year,” Shirakawa said.

The governor declined to make direct comment on recent remarks by
opposition party leader Shinzo Abe, but speaking in general terms, he said, “My
answer is it’s not realistic.”

The average year-on-year rise in Japan’s CPI was only 1.3% even during the
second half of the 1980s and at the peak of the asset bubble, the annual
inflation rate was below 1%, he said.

Abe, who is touted as a top contender to the premiership after the Dec. 16
parliamentary elections, said on the weekend that he would consider making the
Bank of Japan buy construction bonds directly from the government, not through
financial markets.

In an unofficial election campaign, he also said last week that he might
propose revising the Bank of Japan Act in order to give the government more
control over monetary policy.

The right-wing politician, who has recently returned to head the main
opposition Liberal Democratic Party after giving up his premiership five years
ago due to poor heath, is also calling for “unlimited” monetary easing by the
BOJ and a reduction in the policy rate to zero or below zero from the current
range of zero to 0.1%.

Shirakawa brushed off Abe’s call for underwriting construction bonds to be
issued for financing public works spending, saying that the BOJ has already been
buying large amounts of JGBs, and even that could be interpreted as financing
fiscal needs.

“The BOJ continues conducting monetary policy in an aggressive manner. If
the BOJ’s JGB buying were misunderstood as fiscal financing, it would cause
long-term interest rates to rise and would have adverse effects on the real
economy,” he said.

Earlier on Tuesday, the BOJ’s policy board voted unanimously, as expected,
to maintain practically zero short-term interest rates and left the scale of its
financial asset-buying fund at Y91 trillion after raising from Y80 trillion on
Oct. 30.

The BOJ also has left its target for the overnight interest rate among
commercial banks at zero to 0.1% since October 2010, when it lowered it from
0.1% as part of “comprehensive monetary easing.”

–email: hinoue@mni-news.com
–email: msato@mni-news.com

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