Friday, September 30, 2016

Ex-U.S. Treasury Summers Welcomes BOJ's Yield Curve And Inflation Targets

By Stanley White
Reuters
September 30, 2016

The Bank of Japan's decision to target the yield curve and allow consumer prices to overshoot its 2 percent goal are welcome steps in Japan's long battle to encourage inflation, said former U.S. Treasury Secretary Lawrence Summers.

Targeting the yield curve will keep interest rates low enough to encourage government borrowing, which is needed to help support the economy, Summers told reporters at a seminar hosted by the Japanese central bank.

The BOJ's commitment to overshoot its price target should encourage inflation expectations and is something other central banks should consider, said Summers, currently an economics professor at Harvard University.

"I salute (BOJ Governor) Kuroda and his colleagues on the BOJ board for their clear signal of an intention to approach 2 percent inflation from above rather than below," Summers said.

"The commitment to yield curve targeting was potentially constructive."

BOJ Governor Haruhiko Kuroda and the policy board overhauled their policy framework last week to focus on controlling interest rates after more than three years of aggressive money printing failed to ignite inflation.

The BOJ announced a target for the 10-year government bond yield of around zero. In the future the central bank will use its existing minus 0.1 percent interest rate, and the 10-year yield target to control the shape of the yield curve.

Summers' comments came after the BOJ seminar speech, which partly focused on "secular stagnation" and how policymakers should respond.

Summers made waves in 2013 when he revived the concept of "secular stagnation" to describe weak demand, low growth and low employment in the U.S. after the global financial crisis.

On Friday, Summers said the natural rate of interest - the short-term real interest rate consistent with full employment - has fallen so far in advanced economies that conventional monetary policy cannot bring rates low enough to create full employment.

Higher savings rates among households and companies, slower population growth and efficiency gains from technology are driving the natural rate of interest lower, Summers said in his speech.

Government spending will help raise the natural rate of interest by raising inflation expectations, and central banks need to make a general commitment to keep rates low enough so it is easy for governments to borrow, he said.

Summers, however, conceded that there may not be much more room for the BOJ and other central banks to take rates further into negative territory as consumers could revolt and start to hoard cash.

Some structural reforms, such as removing barriers to corporate investment, could raise the natural rate of interest but the burden should fall on cooperation between fiscal and monetary policy, he said.


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