Bank of Japan Governor Masaaki Shirakawa said an excessive focus on short-term inflation development may ultimately result in larger swings in the economy through correction of financial imbalances.
Most central banks of the advanced economies are now conducting policy with the aim of maintaining price stability in the medium to long term, he said at a conference sponsored by the Federal Reserve Board and the International Journal of Central Banking over the weekend.
Monetary easing only mitigates pains associated with balance-sheet repair, the governor said. Furthermore, employing this mitigator for a longer period will reduces incentives for companies and households to lessen excess debt and causes delays in balance-sheet repair, central bank chief added.
"If low interest rates induce investment projects that are only profitable at such interest rate levels, this could have an adverse impact on productivity and growth potential of the economy by making resource allocation inefficient," said Shirakawa.
by RTT Staff Writer
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