By Mayumi Otsuma and Masahiro Hidaka
/www.bloomberg.com/ Japan's central bank shouldn't be pressured into adopting an inflation target as it tries to stem four years of falling prices, a former deputy chief of the Bank of Japan said.
An inflation target -- setting a goal for prices to rise, and pumping money into the banking system until it's met -- is one of many tools available to a central bank, said Toshihiko Fukui, considered a frontrunner to succeed central bank Governor Masaru Hayami. A decision to use it should be left to the bank, he said.
``Deflation is something like being trapped in a pit and we can't get out of it unless everyone plays his or her own role,'' Fukui said. Proponents of an inflation target ``never explain specifically how we can get out of a hole with a target.''
Heizo Takenaka, the government's economic and fiscal policy minister, and other top officials have put pressure on the Bank of Japan to adopt an inflation target to stem a slide in prices that has sapped the world's second-biggest economy. That's a step opposed by Hayami, who retires as central bank chief on March 19.
Last week, in a rare rebuttal to the government, which has urged the central bank to inject more money into the economy, Yutaka Yamaguchi, a BOJ deputy governor, said the administration should do more to boost spending if it expects the bank to make further efforts to stop price declines.
If raising prices is a policy priority for the government, ``it may need to draw on its resources with fiscal steps to achieve the goal,'' Yamaguchi said.
Central banks in Canada and New Zealand use inflation targets to fight rising prices. No bank has yet adopted one to fight falling prices.
In a Pit
Four years of falling prices have eroded the value of real estate, inflated debt payment burdens and created fresh bad loans at lenders. Japan may be on the verge of falling into a fourth recession in a decade, economists say.
Haruhiko Kuroda, vice finance minister for international affairs, this month said the central bank should aim to push up prices by 3 percent in three years. Financial Services Minister Heizo Takenaka echoed that suggestion last week.
Hayami and other central bankers say there are no policy tools to guarantee raising prices in Japan, and that such promises might hurt the bank's credibility.
Speculation about the central bank's next policy action gained momentum last week as Prime Minister Junichiro Koizumi said in an interview with CNBC he wants to choose as the bank's next governor a person ``with an aggressive will to overcome deflation.'' Still, Koizumi added he's not making an inflation target a litmus test for candidates to be the next governor.
Public Debt
The central bank is under growing political pressure to do more to shore up the economy as the government, with public debt equaling 140 percent of the gross domestic product, can't afford large spending programs to boost public works and cut taxes.
The bank cut interest rates to near zero in March 2001 and has made as much as 20 trillion yen ($167 billion) available to banks to stem a lending slide. Hayami has said abundant funds provided by the bank won't flow through the economy unless lenders get rid of $420 billion in bad loans.
Takenaka said in October the government and the central bank may need to make a ``policy accord'' to stop four years of falling prices.
``If an accord means the central bank must do whatever the government tells it to do, that shouldn't be acceptable,'' Fukui said.
Fukui declined to comment on the succession issue. Besides Fukui, current deputy governor Yamaguchi, Nobuyuki Nakahara, a Bank of Japan policy maker until March, and Naoki Tanaka, head of the think tank affiliated to Japan's largest business group, Keidanren, are also mentioned as likely successors to Hayami.
Fukui joined the central bank in 1958 and served there for 40 years. He's currently head of the Fujitsu Research Institute, a private think tank, and deputy head of the Japan Association of Corporate Executives, the nation's second-largest business group.
Investors say the government will probably heighten pressure on the central bank to buy more government bonds from banks to keep borrowing costs low.
``That shouldn't be allowed,'' Fukui said. It's impossible for the central bank to ``manipulate'' long-term interest rates, and the bank's job is to ensure long-term rates are set in a stable manner, by reflecting expectations for future growth and inflation, he said.
The government may even ask a new governor to scrap the bank's limit on its bond purchases, investors say. The bank currently limits its government bond holdings to less than the value of paper money in circulation.
The central bank ``won't hit the limit so easily,'' Fukui said. Any move to scrap the limit ``should be discussed very cautiously.''
Fukui said the government should allow non-viable companies to fail. Otherwise they will undercut viable rivals by cutting prices.
Although the government decided to set up an Industrial Revitalization Corp. to pick companies to be rescued or shut down, ``it's unclear if closures of companies will be really pursued,'' Fukui said.