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At Bank of Japan, no good deed goes unpunished

Monetary policy makers in some of the world's biggest economies are being counted on for much of the heavy lifting out of the post-downturn malaise afflicting so-called advanced nations, and with that stepped-up role comes stepped-up scrutiny.

Which is why many have been at pains to better explain their actions to the public. In the case of the U.S. Federal Reserve and the Bank of Japan, a big part of efforts to communicate more effectively has been adopting formal inflation targets, 2 per cent for the Fed, and 1 per cent for the BOJ. In an op-ed for The Financial Times this month, Bank of Canada Governor Mark Carney surmised that the adoption or targets by the Fed and BOJ "improves the effectiveness of their unconventional policies, and will be essential to manage their exit from those policies."

At least in terms of blunting criticism, the strategy is already paying off for the Fed and chairman Ben Bernanke.

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By establishing a formal inflation target in January, the U.S. central bank took some ammunition away from congressional critics who have argued that the Fed's efforts to prop up the economy -- leaving interest rates at rock-bottom levels, but also buying trillions of dollars worth of assets -- risked sparking runaway price gains, and that Mr. Bernanke and his allies were too blasé about this prospect.

For Bank of Japan chief Masaaki Shirakawa, meanwhile, inflation targeting so far is making life more complicated than it was supposed to.

In February, Mr. Shirakawa introduced his "goal" of 1-per-cent inflation, in response to a mirror image of the criticism faced by the Fed. The shift came in response to dreadful economic conditions -- long-standing, but exacerbated by the 2011 earthquake and tsunami -- and also to escalating pressure from frustrated politicians who have urged Mr. Shirakawa to be clearer about what he is trying to achieve with a range of policies that seem to have done precious little. (Indeed, since the late 1990s, Japan has experienced inflation of 1 per cent or higher for just a few months, in 2008 -- and that was only because global energy prices were soaring.)

There's little worry that the BOJ will overshoot its inflation target any time soon.

At the same time, though, minutes of a meeting last month indicate the central bank is now making an effort to counter the impression in markets that it will automatically keep adding to its asset-purchase program until policy makers meet that 1-per-cent goal.

"Members made note of some misunderstanding that the bank would continue to increase the size of its program in an automatic manner," according to the minutes of an April 27 meeting. "They agreed that the bank needed to fully explain that it made decisions on its monetary policy stance after carefully assessing the economic and price situation."

Analysts say if the yen keeps rising, hurting Japanese exporters, then another round of asset purchases to weaken the currency will be needed. And, given the global jitters about Europe, a higher yen seems likely as investors flock to safe-haven securities. Still, the BOJ's balance sheet as a share of gross domestic product is already approaching 33 per cent, which according to an analysis by Bloomberg News exceeds the European Central Bank's 31 per cent and the Fed's 20 per cent.

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So, damping expectations that it will grow in perpetuity could be important down the road if prices actually start gaining more rapidly and the central bank has to defend its approach to inflation. (Also, the BOJ is mindful that it must avoid being seen as underwriting Tokyo's deficit spending. Fitch Ratings last week cut Japan's sovereign-debt rating, citing what it views as a "leisurely" belt-tightening plan. The minutes from the April BOJ meeting indicate some officials were worried the bond purchases could be seen as financing the government's massive debt.)

More immediately, though, the central bank's refreshing honesty about its need to communicate better is having an unintended negative effect on its efforts to boost the economy. For instance, after the minutes were made public, most Japanese stocks fell, at least in part because investors were disappointed by the BOJ's non-committal stance on further asset purchases.

For some central bankers these days, no good deed goes unpunished.

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About the Author
Economics/business writer

Jeremy has covered Canadian and international economics at The Globe and Mail since late 2009. More

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