Newspaper article International Herald Tribune

Central Bank in Japan Sets Inflation Goal for 1st Time ; but Economists Suggest Decision Is a Hollow Attempt to Appease Critics

Newspaper article International Herald Tribune

Central Bank in Japan Sets Inflation Goal for 1st Time ; but Economists Suggest Decision Is a Hollow Attempt to Appease Critics

Article excerpt

The central bank has faced growing political pressure to make a clearer commitment to increasing inflation, as an economic rebound following the natural disasters last year runs out of steam.

In a bid to win back confidence in its long-futile battle against falling prices, Japan's central bank on Tuesday set an inflation target for the first time and expanded an asset-purchase program, but economists said the moves would do little to shore up the country's fragile recovery.

The Bank of Japan has faced growing political pressure to make a clearer commitment to increasing inflation, as an economic rebound after the natural and nuclear disasters last year runs out of steam. The government said Monday that the Japanese economy shrank an annualized 2.3 percent in the October-to-December quarter, reversing robust gains in the previous three months, as weak overseas demand and a strong yen hurt manufacturing.

Excessive inflation was a cause for concern for Japan during its period of rapid growth in the 1970s and 1980s, and emerging economies are still careful to prevent prices from rising too quickly. But as the Japanese economy stagnated over the past two decades, it has fallen into deflation, the damaging downward spiral in prices that saps corporate profits and wages.

Both politicians and economists have long criticized the Bank of Japan for not doing enough to combat falling prices. That criticism reached a fever pitch after the U.S. Federal Reserve, facing economic pressures of its own, set a 2 percent inflation target last month. A gloomy outlook for the global economy during Europe's debt crisis has also added to the panic.

At its policy meeting Tuesday, the Bank of Japan's board voted to set consumer inflation of 1 percent as its price goal for the time being, making its commitment to end deflation more explicit. The bank had previously defined 1 percent as its "understanding" of a desirable pace of growth in prices, which economists interpreted as a weaker stance.

Prices in Japan have not risen over 1 percent since 1997, when deflation set in.

The central bank also added Yen 10 trillion, or $128 billion, to a Yen 65 trillion asset-buying and lending program, a measure designed to stimulate the flow of funds in the moribund economy. Under the program, the bank buys government and private debt and lends out funds, increasing the amount of money available for economic activity. The bank's purchases of government bonds also help sustain Japan's mammoth public debt burden.

As widely expected, the bank left its benchmark interest rate unchanged at a range of zero to 0.1 percent.

"We welcome the Bank of Japan's policy measures, which constitute aggressive steps to beat deflation," the finance minister, Jun Azumi, said after the decision. "We hope the bank's bold monetary easing will boost the economy. …

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