With positive economic news as a backdrop, Sebastian Moffett speculates on what is next for the Bank of Japan, in this morning's Wall Street Journal (page A9 of the print edition):
Now that Japanese prices have stopped pushing relentlessly downward, the time is approaching for a new monetary policy from the Bank of Japan. The question is: What kind?..
The central bank's policy since 2001 has been a "super easy" approach that amounts to an emergency treatment designed specifically to halt falling prices. The central bank has again targeted zero overnight interest rates to encourage borrowing, and -- in a policy called quantitative easing -- it pumps liquidity into banks to encourage them to make loans.
The central bank has said that once core consumer prices -- which exclude volatile fresh-food prices -- start to grow consistently, it will abandon this policy. But central-bank officials haven't yet made it clear what the bank will do afterward...
Much of the debate involves setting a numerical inflation target, as the European Central Bank and the Bank of England do, and which the U.S. Federal Reserve may consider under Chairman-designate Ben Bernanke.
"A target is needed for monetary-policy guidance" so that people understand what the central bank is doing, says Takehiro Sato, senior economist at Morgan Stanley.
The central bank so far has avoided a numerical inflation target, fearing such a commitment would reduce its flexibility to forestall another asset bubble: If it always has to adjust policy just to meet a consumer-price inflation target, it won't be able to tighten policy when necessary to put a lid on asset prices...
Many economists side with the politicians. Mr. Sato of Morgan Stanley says that, unlike the Fed, which has won a high degree of respect for its handling of monetary policy, Japan's central bank isn't yet trusted by markets because of its past moves and so needs to be disciplined by a target. "The [central bank's] policy track record is bad," he says. "If there is no target, there will be anxiety over future expectations of monetary policy, due to the lack of credibility" of the central bank...
So an increasing number of economists expect the central bank to announce a loose kind of inflation target if consumer prices rise in the first few months of 2006. "The political pressure is increasing," says Kiichi Murashima, chief economist at Nikko Citigroup. "The issue now is how concrete the target will be."
Question: By this time next year, how many major central banks will be without some type of explicit numerical inflation objective?