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The following OECD assessment and recommendations summarise chapter 2 of the Economic survey of Japan published on 7 April 2008.
The central bank’s decision to leave interest rates unchanged since early 2007…
Given slower output growth, increased uncertainty about the economic outlook and continued deflation, the Bank of Japan has appropriately kept its short-term policy interest rate unchanged at ½ per cent since February 2007. Under the new monetary policy framework introduced in 2006, the central bank sets the policy interest rate to achieve a path of sustainable growth under price stability. As part of the framework, the Bank of Japan’s Policy Board announced that 0 to 2% is its understanding of price stability in the medium to long term, the first time that it has specified an inflation range. In addition, the central bank examines risk factors that may significantly impact economic activity and prices in the longer term.
Interest rate developments in Japan
1. Ten-year government bonds.
Source: OECD, Analytical Database and Bank of Japan.
… should be maintained, while reforming the new monetary policy framework introduced in 2006
The Bank of Japan should not raise the short-term policy rate further until inflation is firmly positive and the risk of renewed deflation becomes negligible. The central bank’s outlook of a 0.4% rise in the consumer price index in FY 2008 is not sufficient to justify interest rate hikes for the time being, particularly as inflation has consistently undershot past projections. Waiting until inflation is significantly above zero would support the expansion and reduce the risk that a negative shock could push Japan back into deflation. The central bank’s Policy Board should thus review the understanding of price stability and increase the lower end of the range to give an adequate buffer against deflation, as the zero floor is too close to deflation for comfort. While the announcement of the Board members’ understanding of price stability enhances transparency, the fact that the inflation range will be reviewed each year makes it less useful as a guide for market expectations over the medium term. The course of monetary policy should take into account progress in fiscal consolidation, which will influence the pace of economic growth and the evolution of inflation.
The Bank of Japan's economic outlook
Percentage change (median value shown in parentheses)1
1. From the Bank of Japan’s semi-annual Outlook for Economic Activity and Prices.
2. Excludes fresh food only.
Source: Bank of Japan.
Projections by the Bank of Japan's Policy Board members
Percentage change projected for FY 2007
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English and in Japanese. It contains the OECD assessment and recommendations.
The complete edition of the Economic survey of Japan 2008 is available from:
For further information please contact the Japan/Korea Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat's report was prepared by Randall S. Jones, Masahiko Tsutsumi and Taesik Yoon under the supervision of Stefano Scarpetta. Research assistance was provided by Lutécia Daniel.