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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 our 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.”

Shirakawa also noted that the Public Finance Law prohibits the
central bank from underwriting government bonds.

“Generally speaking, the BOJ has been buying large amounts of JGBs.
Underwriting of government bonds has never been conducted in advanced
nations or developing countries.”

He added that the International Monetary Fund also ranks
government bond underwriting by central banks high on the list of
measures that should be avoided.

Shirakawa also rejected the idea of applying negative interest
rates to savings and loans.

“If interest rates were lowed to zero or into negative territory, a
sense of security among market participants about being able to raise
funds anytime would disappear. Once the economy receives a shock, it
could cause anxiety about liquidity,” he explained.

“Negative interest rates would also increase banks’ funding costs,
which would prompt them to pass higher costs onto their lending rates.
That would eventually make the financial environment tighter.”

Shirakawa also said negative interest rates would reduce banks’
incentive to participate in the BOJ’s daily funding operations.

The BOJ aims to create the most appropriate financial environment,
based on the prospects for economic activity and prices, he said.

The governor also said central bank independence must be
maintained for sustained economic growth with price stability.

Monetary policy plays the role of a warning system against
excessive economic activity, he added.

As part of its election campaign platform, the opposition LDP
decided on Monday to include a review of the BOJ Act, which was last
revised in 1998 to enhance central bank independence.

Since the BOJ Act is a fundamental law, if Japan were to
review it, it should spend sufficient time and give it careful
consideration, Shirakawa said.

In response to some politicians’ call on the BOJ to inject massive
liquidity into the financial system in order to beat deflation, he said
the BOJ has already added large amounts of cash.

“There is a shared view among advanced economies that it is more
important to conduct a policy designed to speed up the circulation of
money than focus on the amount of money supplied,” he said.

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

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