Working Paper: NBER ID: w10818
Authors: Takatoshi Ito
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.
Keywords: Inflation Targeting; Bank of Japan; Deflation; Monetary Policy
JEL Codes: E42; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Board members' beliefs about appropriate price indices and inflation rates (E31) | Decision not to adopt inflation targeting (E52) |
| Lack of consensus on a suitable price index and appropriate inflation rate (E31) | Board's hesitation in adopting inflation targeting (E61) |
| Perception of conventional tools to increase inflation as unavailable (E31) | Reluctance to adopt inflation targeting (E61) |
| Fear of damaging the Bank's credibility (G21) | Reluctance to announce a positive inflation target (E31) |
| Political environment concerns (D72) | Negative views towards inflation targeting (E31) |