The head of Japan’s central bank has vowed to work with the nation’s new government to tackle deflation, according to an interview published yesterday.
“The Bank of Japan, not just the government, will support efforts to strengthen growth potential,” Bank of Japan Governor Masaaki Shirakawa told the Nikkei business daily.
Shirakawa added that both monetary easing and measures to strengthen economic growth were necessary to boost inflation.
He made the remarks after Shinzo Abe, sworn in as Japan’s prime minister on Wednesday, proposed the bank set a 2 percent inflation target in a bid to fight deflation that has plagued the world’s third largest economy for years.
On Thursday, newly appointed Japanese Finance Minister Taro Aso also hit out at the bank, saying it was “slow” in tackling deflation.
However, Shirakawa stopped short of agreeing to the proposed target, only saying: “We hope to thoroughly discuss figures at the next policy board meeting [in January]. What will be important is securing flexibility within monetary policy.”
Deflation continues to pose a threat to Japan’s recovery as a fall in prices eats into corporate profits, leading firms to slash jobs and put off growth-generating capital investment.
It also hurts demand because it encourages consumers to put off making purchases in the hope of paying less further down the road.
In its previous board meeting last week, the bank launched its third round of easing since September after counterparts in the US and Europe also ushered in huge moves to counter slowing growth.
The move was widely seen as a bow to Abe, whose comments have been viewed as a direct challenge to the bank’s independence in setting policy.
The Japanese economy is facing many hurdles as it struggles to reverse long-term deflation, according a report from ratings agency Standard & Poor’s on Friday.
The Liberal Democratic Party took power this week on a campaign that pledged to inject new life into the limp economy, after it won a landslide election earlier this month.
S&P said the election raised hopes the world’s third-largest economy may be able to escape the deflation that has haunted it for years, and recommended that policy makers “aggressively implement” measures to do so.
“It is positive that the Japan reflation issue is in play again and, with the change in government, Japan is likely entering a period of both policy and market action,” S&P’s chief economist Paul Sheard said. “However, the hurdles to a policy-induced reflation are many, and they are high.”
The report said past actions by the Bank of Japan were not enough and warned it was unlikely the bank would take the sweeping actions necessary to bring about reflation.
The report comes as data released on Friday showed consumer prices in Japan slipped 0.1 percent on an annualized basis.