Shirakawa examines ways for Japan to hit 2% inflation target

Inflation is an important element of an economic recovery in Japan, but it must be driven by the right factors if it is to be beneficial, according to Masaaki Shirakawa, the outgoing governor of the Bank of Japan (BoJ).

Delivering his last speech as governor, Shirakawa said a number of factors could allow the BoJ to hit its 2% inflation target, for example from rising import prices, rising wages, higher inflation expectations and higher growth expectations. Of the drivers of inflation, Shirakawa warned that factors that come as a result of higher commodity prices or a depreciating yen could be damaging to the economy.

A recovery of expectations was likely to be the most beneficial. "Looking at the relationship between medium- to long-term inflation expectations and potential growth rates, there is a clear positive correlation in Japan," he said.

To improve expectations was not necessarily easy, Shirakawa said, with a need for fiscal sustainability, greater labour force participation by older people and women, and monetary easing, which he stressed the BoJ was already delivering.