Ex-BOJ gov Shirakawa urges re-examination of monetary framework, inflation targets

11:04 pm Wednesday, March 01st, 2023

By Leika Kihara

TOKYO (Reuters) – Former Bank of Japan (BOJ) Governor Masaaki Shirakawa called on policymakers to reconsider central banks’ monetary framework based on inflation targets, given their limits that became apparent from the recent spike in prices seen in many countries.

Before the recent spike in inflation, many central banks in advanced economies were “overwhelmingly” concerned about low inflation, and failed to restrain rapid price gains by judging them as transitory, Shirakawa said in a column published by the International Monetary Fund (IMF) on Wednesday.

By allowing inflation to overshoot their targets, central banks “forgot the difficulty of taking away the monetary punch bowl” and failed to tighten policy soon enough, he said.

“Inflation targeting itself was an innovation that came about in response to the severe stagflation of the 1970s and early 1980s. There is no reason to believe it is set in stone,” Shirakawa said.

“Now that we know its limitations, the time is ripe to reconsider the intellectual foundation on which we have relied for the past 30 years and renew our framework for monetary policy,” he added.

Shirakawa, who was BOJ governor before incumbent Haruhiko Kuroda, also criticised the central bank’s current forward guidance committing to keep interest rates ultra-low.

“When the economy is hit by a surprise shock to demand or supply, forward guidance of continuing low interest rates can suddenly become too expansionary and inflationary. This may partly explain what we are seeing now,” he said.

During his term as BOJ head until 2013, Shirakawa was frequently criticised for doing too little too late to pull Japan out of decades of deflation and economic stagnation.

His successor and current governor, Kuroda, deployed a “bazooka” stimulus programme in 2013 that boosted growth for several years, but failed to fire up inflation to the BOJ’s 2% target and left the bank with a dearth of ammunition.

With rising raw material costs keeping inflation well above the BOJ’s 2% target, markets are rife with speculation the central bank will phase out its massive stimulus when incoming governor Kazuo Ueda succeeds Kuroda in April.

In a parliament confirmation hearing on Monday, Ueda said he had ideas on how the central bank could exit its massive stimulus, but stressed a shift to tighter policy would only come when Japan’s trend inflation heightens significantly.

Ueda also said he saw no immediate need to revise the BOJ’s 2% inflation target.

(Reporting by Leika Kihara; Editing by Shri Navaratnam)