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Inflation target could

be disastrous for Japan: BoJ member

TOKYO: The Bank of Japan (BoJ) risks economic disaster and its own bankruptcy if it gives in to calls to adopt an inflation target, according to one of its board members.

The appeal, growing more strident from at least one central banker and members of the ruling Liberal Democratic Party, is designed to force the Bank of Japan into a more aggressive stance to reinvigorate the depressed economy.

But board member Kazuo Ueda wrote in Monday's Asian Wall street Journal that the "obsession with inflation targeting is odd."

"No country has ever used inflation targeting to reflate the economy" but rather to curb price rises, he said in a column.

The BoJ had a "zero-rate" policy designed to stave off the opposite problem, deflation after a decade-long slump, Ueda noted.

The central bank, legally obliged to keep prices in check and fearing the consequences of letting inflation rip, could not give in to the temptation of seeking a short-cut to growth, the board member said.

Increasing the money supply, by for example buying up more short-term government debt, was not an option.

Japanese consumers are already sitting on a huge pile of cash in the from of postal saving, Uedo noted, but they are not spending much of it.

"People simply do not need any more money." And the BoJ must not take the other option of stimulating the economy by purchasing long-term government bonds.

Credit risk appraiser Moody's Investors Service last month placed Japan on review for a domestic ratings downgrade because of spiralling government debt aimed at reflating the economy, Uedo recalled.

But he dismissed another argument put forward for an inflation target, that higher prices would help cancel out Japan's unprecedented debt obligations.

"The BoJ's increased involvement in the market may aggravate investors' fears about the long-run state of the Japanese budget and provoke a sudden rise in JGB (Japanese government bond) rates."

Purchases of long-term government bonds as a means to drive up prices could have even more dangerous consequences, Uedo said.

"To hold down long-term rates, the BoJ would be forced to purchase a huge amount of government bonds," he wrote.

At some point these would have to be sold back to the market at a lower price and higher rate of interest, "generating serious capital losses for the central bank."

"In such a case, the government would need to agree in advance that it would recapitalise the central bank."

By courting bankruptcy in this way, the BoJ would be playing with fire. Uedo also rejected the notion, argued most notably by high-profile US economist Paul Krugman, that the mere act of adopting an inflation target would "lead to increased spending goods and services."

"But this will not happen in Japan unless the economy escapes the current zero-interest-rate trap by, say, a sudden change in consumer psychology." Moreover, Uedo said, the Japanese economy was set for recovery after likely slipping back into recession in the three months to December.ÑAFP