Discussion of Inflation Targeting and Japan: Why has the Bank of Japan not Adopted Inflation Targeting?

This paper argues that the Bank of Japan shrank from doing the right thing because it required the adoption of unconventional policies that might lose the Bank its newly acquired independence. Taka Ito frankly recognises that this argument has a problem: the Bank of Japan adopted two and a half of the recommended unconventional policies: increasing excess reserves, buying government bonds and buying shares – with the last counted as one-half because the justifi cation was couched in terms of fi nancial stability rather than monetary policy. Moreover, the author seems to argue that the other unconventional policy of buying foreign bonds, or in Svenssonʼs formulation, depreciating the exchange rate, was in effect adopted in the form of heavy intervention by the Ministry of Finance, matched by a broadly parallel rise in excess reserves at the central bank. This leaves only infl ation targeting as the unadopted unconventional policy.