Japan mulls boosting inflation

BOJ's Hayami: Central banks shouldn't create inflation

Japan's central bank should be set a target to increase inflation, according to a group of Japanese politicians.

A group of Liberal Democratic Party politicians intend to propose a law in parliament next month, amending the 1998 legislation which guaranteed the central bank's independence.

The Bank of Japan governor Masaru Hayami has called the idea absurd.

Analysts say the government is ultimately shying away from forcing through the reform needed to lift the country's economy out of its deflationary spiral.

Reform could lead to further factory closures. This would reduce the amount of goods for sale and thus - in theory - force prices higher.

High prices

The idea of setting targets to increase inflation has surprised some observers as, even following two years of deflation, prices in Japan are still among the highest in the world

Economics minister Heizo Takenaka - a champion of Prime Minister Junichiro Koizumi's reform agenda - has called for the bank to have inflation targets. He insists that it shouldn't influence its independence.

"Led by political pressure, the wave seems to be heading towards the direction of adopting inflation targeting," Tomoko Fujii, a director of Nikko Salomon Smith Barney.

Credibility

The central bank believes it is a threat to their credibility, Commerzbank's Ron Bevaqua told the BBC's World Business Report.

With interest rates virtually at zero, the suggestion is that the Bank of Japan would have to do more - for example buy bonds, or even consumer goods.

"Once you open this Pandora's box you can't put it back in...You can't create a little bit of inflation," he said. "Is the Bank of Japan going to do it indefinitely? Where does the rest of the demand come from?"

"They have to close factories they don't need, that is what Japan is refusing to do," he said.