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By Kanako Chiba
Tokyo, Dec. 2 (Bloomberg) -- The Bank of Japan should set an inflation target to stop four years of falling prices, Haruhiko Kuroda, Japan's vice minister of finance for international affairs, said in an essay published in the Financial Times.
The central bank should adopt ``innovative'' policies, including ``an explicit inflation target of 3 percent to be achieved in stages -- such as 1 percent inflation within a year, and 2-3 percent within the following two years,'' Kuroda wrote in an essay written together with Masahiro Kawai, his deputy.
Kuroda added that an inflation target for Japan should be higher than the 2 percent to 3 percent level the European Central Bank set for itself.
The Bank of Japan cut interest rates almost to zero in March 2001 and has provided trillions of yen in extra cash to lenders in a failed attempt to stop falling prices, which erode corporate profits. Politicians have urged the central bank to set an inflation target, an idea Governor Masaru Hayami has opposed.
Kuroda also urged the central bank to provide more money to the market.
``The BOJ clearly needs to provide more liquidity to the market and constantly increase base money though purchases of long- term government bonds and other financial instruments,'' he said.
The BOJ decided on Oct. 30 to expand its monthly bond purchases by a fifth, to 1.2 trillion yen. Last month, the bank said it would increase the pool of money credited to the accounts of commercial banks as close as possible to 20 trillion yen, its current limit.