— Updating 00:01 ET Story At 6th Par To Add Details

TOKYO (MNI) – Bank of Japan Governor Masaaki Shirakawa on Friday
said there is a long way to go before Japan can see clear prospects for
price stability of around 1% annual inflation measured by the CPI.

He also told reporters at the Japan National Press Club that
setting a price goal of achieving 2% CPI gains in the long term would
“cause uncertainty among businesses and households,” as the economy has
never seen an inflation rate sustained at such a high level.

During his speech, he repeated his mantra that in order to help
beat years of deflation, Japan must raise its economic growth potential
by boosting overall productivity and providing new supplies to match new
demands in the fast-aging society.

The governor repeated his previous remarks that the strong yen has
a negative impact on Japan’s export-led recovery in the short term,
overwhelming its longer-term benefit of boosting the economy’s
purchasing power.

He also reiterated the BOJ’s oft-repeated pledge to not buy
Japanese government bonds for the purpose of financing fiscal needs and
noted the cental bank has already been buying large amounts of JGBs from
markets.

Japan has been “making progress in our steps towards overcoming
deflation,” he said.

“However, we admit that the inflation rate still has a long way to
go before it reaches the 1% goal that the bank has set for the time
being, as indicated in the price stability goal in the medium to long
term.”

At its latest meeting on Feb. 13-14, the BOJ policy board surprised
markets by boosting its already large-scale unconventional financial
asset buying program by a further Y10 trillion (all in JGBs) to Y65
trillion and adopting a more explicit 1% inflation ‘goal’ while keeping
its practically zero interest rate policy unchanged.

Though the terms may have been tweaked, the BOJ’s goal of
longer-term annual price increases above zero and no more than 2% as
measured by the consumer price index remains unchanged.

In support of that goal, Shirakawa noted that Japan’s annual CPI
growth has remained within 2% in most cases and that it was below 1%
during the asset bubble of the late 1980s.

He also said the BOJ will review its price goal commitment once a
year, closely checking on the upward bias in CPI data and ensure that
the goal has an adequate safety margin.

The career central banker said there is no point in strictly
classifying whether or not a policy amounts to inflation targeting
because policy goals set by major central banks have been converging on
the longer-term achievement of sustained growth with price stability,
instead of focusing on short-term price swings.

“The essence of monetary policy is to buy time,” he said. “It
generates demand through lower interest rates when demand lacks. While
(monetary policy) eases a temporary shock, the economy returns to its
orignal growth track on its own.”

But under a zero interest rate regime, incentives for spending and
investment are limited, which means adjustments have to be made to
resolve structural issues while monetary easing supports the economy by
adding liquidity, he added.

Shirakawa sought to quell criticism that the BOJ is not doing
enough to fight deflation.

At the end of 2011, the amount of JGBs held by the BOJ was Y66.1
trillion, accounting for 14.2% of Japan’s nominal GDP, he said.

“Although you may have the impression that the U.S. Federal Reserve
has aggressively purchased government bonds, its holdings at the end of
last year were 10.8% of nominal GDP,” he said.

The holdings by the European Central Bank, which started making
such purchases in 2010, represented 2.2% of nominal GDP, he added.

Shirakawa also said Japan has sufficient money in circulation, with
the ratio of money stocks (Y805 trillion) to nominal GDP (Y467 trillion)
is 1.7, the highest among major economies.

tokyo@marketnews.com
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