Bank of Japan ends loose money policy

As predicted by some analysts, The Bank of Japan decided on Thursday to end its five-year ultra-loose monetary policy, exchanging it for a policy of targeting the overnight call rate. The Bank said, in announcing its decision, that the economy has exited deflation and returned to normal with no danger of returning to deflation. Only one member of the Bank’s board voted against the policy change.

The Bank took a step toward a reference target by stating that as far as it is concerned, price stability consists of prices remaining in a range of 0 to 2 percent of the Consumer Price Index, something that is worrying to some critics of the Bank’s change in policy. These critics suspect that there is a bias in the CPI that could allow prices to fall again. The Bank, in a concession to the critics, said that it would consider allowing what it called “slight inflation” if it seemed that deflation would again become a risk.

In its policy announcement, the Bank said that interest rates are expected to remain near zero percent for the time being, and that it will continue to buy government bonds. The latter move was a concession to the finance ministry, which expressed concerns about a sudden withdrawal of the Bank as a buyer of last resort for the bonds.

The Bank implemented its policy change despite political pressure from Prime Minister Junichiro Koizumi and others who continued to express doubts that deflation has actually ended. Some analysts said that this pressure was what moved the Bank to move when it did, in order to assert its independence from the government.

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