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Inflation Targeting and Japan: Why has the Bank of Japan not Adopted Inflation Targeting?

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Takatoshi Ito

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Abstract

The paper aims at explaining why the Bank of Japan has not adopted inflation targeting, despite calls for such a policy. Disclosed minutes of the Monetary Policy Meetings of the Bank of Japan, after March 1998, as well as Speeches by its members give clues to changing reasons against inflation targeting. Inflation targeting was not adopted in Japan in the early years (the first wave of interest in1999-2000) because the Board members were not sure about an appropriate price index, and a specific number for an appropriate inflation rate. A Bank of Japan study, completed in October 2000, did not give any clear answers. Inflation targeting was not adopted in later years (2001-2003), despite the inflation-targeting-like commitment strategy adopted in March 2001, because the Board members thought that conventional tools to increase the inflation rate were not available. As such, they thought that announcing a target with a positive inflation rate would damage confidence. In terms of introducing unconventional measures, the Bank of Japan worried about the transmission channels and the damage to its balance sheet. Towards the end of Governor Hayami fs term, the views against inflation targeting turned sharply negative, as news reports suggested that it may be linked to the new Governor fs appointment. Therefore, , why inflation targeting was not adopted, can be explained and understood from a political economy perspective.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10818.

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Date of creation: Oct 2004
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Handle: RePEc:nbr:nberwo:10818

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Find related papers by JEL classification:
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Dai, Meixing & Sidiropoulos, Moïse, 2005. "Flexibility in inflation targeting, financial markets and macroeconomic stability," MPRA Paper 13864, University Library of Munich, Germany. [Downloadable!]
  2. Luca Colombo & Gerd Weinrich, 2006. "The Role of Expectations in a Macroeconomic Model with Inventories," Computing in Economics and Finance 2006 65, Society for Computational Economics. [Downloadable!]
  3. Claudio Morana, 2005. "The Japanese deflation: has it had real effects? Could it have been avoided?," Applied Economics, Taylor and Francis Journals, vol. 37(12), pages 1337-1352, July. [Downloadable!] (restricted)
  4. Baltensperger, Ernst & Fischer, Andreas M & Jordan, Thomas J., 2006. "Strong Goal Independence and Inflation Targets," CEPR Discussion Papers 5915, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Gerd Weinrich & Luca Colombo, 2005. "Money, Inventories and Underemployment in Deflationary Recessions," Computing in Economics and Finance 2005 156, Society for Computational Economics. [Downloadable!]
  6. Takatoshi Ito & Frederic S. Mishkin, 2004. "Two Decades of Japanese Monetary Policy and the Deflation Problem," NBER Working Papers 10878, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Tom Cargill & Federico Guerrero, 2006. "A ‘Second-Best’ Rationale to Deflationary Monetary Policy in Japan," Working Papers 06-009, University of Nevada, Reno, Department of Economics & University of Nevada, Reno , Department of Resource Economics. [Downloadable!]
  8. Tom Cargill & Federico Guerrero, 2006. "A Reassessment of the Problems with Interest Targeting: What Have We Learned from Japanese Monetary Policy?," Working Papers 06-010, University of Nevada, Reno, Department of Economics & University of Nevada, Reno , Department of Resource Economics. [Downloadable!]
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