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Bank of Japan’s new mandate to overcome inflation

Bank of Japan Governor Shirakawa emphasized his instutions strengthened mandate to end deflation. The key decisions were the introduction of a 2% inflation target and the initiation of a new open-ended Asset Purchase Program.

Speech by Mr Masaaki Shirakawa, Governor of the Bank of Japan, at the Japan National. Press Club, Tokyo, 25 January 2013

As pointed out by BoJ Governor Shirakawa, ”….the Bank of Japan introduced additional steps at the January 2013 Policy Meeting to provide monetary accommodation in a decisive manner…”
  •  “The first is the introduction of the price stability target, at 2%… …the average year-on-year inflation rate, even during the bubble years – the latter half of 1980s – was 1.3%. 1985-2011, the average inflation rate was 0.5%… The decision on the price stability target by the Bank was both a decision on a target and a flexible inflation targeting framework…The conduct of monetary policy has to be flexible by examining various risk factors, including those related to financial imbalances… Looking at the practices of overseas central banks, irrespective of the adoption of inflation targeting, no specific date has been set for achieving price stability. The Bank’s view on price stability is based on a similar understanding in that [it] aims to achieve price stability on a sustainable basis.”
  •  “The second element is the introduction of the open-ended asset purchasing method. …aiming to achieve the above-mentioned price stability target, through a virtually zero interest rate policy and purchases of financial assets…The size of the current Asset Purchase Program is set to increase by nearly JPY40 trn over the course of this year [about 7.5% of GDP]. Furthermore, the Bank has introduced from the beginning of this year a scheme to provide financing to financial institutions, up to the amount of net increases in lending at each financial institution. More than 15 trillion yen would be provided through this scheme by the spring of 2014. Meanwhile, with respect to the Asset Purchase Program, after completing the current purchasing method, from January 2014, the Bank will introduce a method of purchasing a certain amount of financial assets every month without setting any termination date…From the beginning of 2014, for some time, the Bank will buy financial assets totaling about 13 trillion yen every month, including 2 trillion yen in long-term Japanese government bonds. Consequently, the size of the Asset Purchase Program alone will increase by about 10 trillion yen over the course of 2014, and the size of the Program is expected to stay at that level from then on. The Bank will thus provide strong monetary stimulus without interruption.”

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