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To: Les H who wrote (199191)	10/22/2002 12:26:18 PM
From: Les H	Respond to of 436258

"CASH BUBBLE" To meet a target for inflation, the Bank of Japan (BOJ) -- whose law commits it to "the pursuit of price stability" -- could decide to buy an unlimited number of assets until the fall in consumer prices is reversed. The BOJ already floods markets with money by buying short-term money products and Japanese government bonds (JGBs), but under an inflation-targeting policy it could add stocks and real estate to its shopping list until prices hit the target. With consumer prices in August down 0.8 percent on the year for a 35th straight month of decline, the central bank's critics say radical action is justified. "We need a more powerful force," said Mitsuhiro Fukao, an economics professor at Tokyo's Keio University. "Deflation in Japan is a bubble in the value of cash. To stop this, the BOJ needs to sell vast amounts of it and to alter people's perceptions of its value," he said. Fukao said the BOJ should set a target of 0.5-2.5 percent growth for the consumer price index by buying an unlimited sum of exchange-traded funds (ETFs) -- listed equity funds that trade like stocks -- to achieve it. One high-profile supporter of an inflation target is Heizo Takenaka, the new chief bank regulator whose task force charged with sorting out the nation's bad loan mess is due to report on Tuesday. Inflation-target advocates were briefly given hope last month when the BOJ came up with a surprise plan to buy stocks direct from banks, but it has since made it clear that the aim was to shield banks from market volatility rather than to boost prices. The BOJ maintained that stock-buying was not a part of monetary policy and limited the purchases to two trillion yen ($16 billion). Last week, BOJ Governor Masaru Hayami again ruled out inflation-targeting as a policy option at this stage. Hayami has insisted that inflation-targeting -- as is in countries like Britain and Australia -- is usually a tool to bring down inflation rather than raise it. JGB CRISIS? Hayami is not alone in his scepticism. Other opponents of the idea say it would only shift the burden from one area of the economy to another. Inflation would cut down on the real value of Japan's massive debt burden -- the biggest of any industrialised nation -- but the resulting rise in yields would raise refunding costs and put the government's wobbly finances under more pressure. That would risk requiring even more debt issuance, something best avoided by a country that recently saw an auction for its benchmark government bond go undersubscribed in what analysts said was a worrying sign of fading confidence. Another worry is that once the inflation genie is out of its bottle, it may be difficult to force back in. "Inflation could spin out of control, and it could then be very difficult for the central bank to make the timely switch to a tightening policy," said Eiji Fukasawa, senior economist at Mizuho Research Institute. "It's a big gamble." The central bank also has to consider financial system stability, which it is mandated to maintain. While inflation would ease banks' bad-debt burden, the inevitable rise in interest rates would erode the huge sum of JGBs on their, and the BOJ's, balance sheet. "After all the trouble of supporting the stock market, the government could then be faced with the burden of supporting the bond market," Shiraishi said. ($1=125.13 Yen) Copyright 2002, Reuters News Service forbes.com