BOJ doubted inflation target effect in 2003: minutes

Former Bank of Japan Governor Toshihiko Fukui opposed the introduction of an inflation target when he assumed the post in March 2003, expressing doubt that monetary policy could affect prices by influencing public sentiment, the minutes of a policy meeting covering January to June 2003 showed Wednesday.

Opposing a proposal by then Deputy Governor Kazumasa Iwata, who called for the introduction of an inflation target at an extraordinary meeting on March 25, 2003, Fukui said monetary authorities would be unable to control market and consumer expectation so as to achieve price escalation, according to the minutes.

The move contrasts with the recent decision of the central bank, which introduced a price target in January this year after Liberal Democratic Party President Shinzo Abe, who supports using an inflation target in seeking to beat deflation, became prime minister in December last year.

In April, current Governor Haruhiko Kuroda decided on large-scale monetary easing steps featuring a doubling of the monetary base and boosting long-term government bond purchases in an attempt to exert influence on people's expectations to move up actual prices.

At the extraordinary meeting in March 2003, Iwata, who was seen as one of the leading candidates to become BOJ governor in March this year, said the quantitative easing policy pursued by Fukui's predecessor Masaru Hayami "lacked the power to overcome deflation."

Iwata called for the introduction of a price target, asserting that monetary policy management "should focus on (setting) a goal" and that it is "essentially important to exert influence on expectations."

Fukui said he felt "sympathetic" toward setting a final goal within the monetary policy from the perspective of securing transparency, but opposed it, as it would be difficult to use the monetary policy to intentionally heighten expectations in order to raise prices.

"I have a basic doubt that we cannot control expectations," he said, according to the minutes.

Regarding the quantitative easing policy promoted by Hayami, Fukui said, "It was very effective to secure stability in the financial market and avoid deflation spiral," but added the policy seemed to have insufficient ability to stimulate economic activity.

At the time, the government led by then Prime Minister Junichiro Koizumi moved to accelerate the disposal of massive bad loans held by banks, prompting the state to make a decision in May 2003 to inject public funds into Resona Bank.

After April, Fukui started studying specific measures to purchase asset-backed securities and decides to further ease monetary grip.