HIGHLIGHTS 3-Quotes from BOJ Shirakawa, Fed Bernanke in Tokyo

(For more stories on the Japanese economy, click [ID:nECONJP])

TOKYO, May 26 (BestGrowthStock) – Bank of Japan Governor Masaaki
Shirakawa said on Wednesday that price stability is important
but is not the sole element in a central bank’s mandate and
price stability alone will not ensure macroeconomic stability.
[ID:nTKX006824]

Federal Reserve Chairman Ben Bernanke stepped up calls to
preserve the Fed’s independence, saying at the same conference
in Tokyo that central banks best deliver steady economic growth
and low inflation when free from political meddling.
[ID:nSGR002077]

Following are key quotes from Shirakawa and Bernanke at the
conference, which was hosted by the BOJ.
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For full text of speeches:
Shirakawa: http://link.reuters.com/fag46k
Bernanke: http://link.reuters.com/dag46k
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SHIRAKAWA:

(From speech)

“I think that a primary mandate for a central bank should be
to achieve a stable financial environment, that is a financial
environment that is consistent with and contributes to
sustainable economic growth.

“Price stability is certainly one important element in
achieving a stable financial environment.

“That is, however, not the sole factor. When a central bank
feels constrained by short-term developments too much, that is
more likely to amplify macroeconomic fluctuations.”

BERNANKE

(From Q+A, when asked about an IMF staff paper proposing
central banks to raise their inflation target to 4 percent:)

“It’s a difficult question to answer on what would be the
optimal level of inflation. These studies are assuming we are
starting from scratch. We’re not starting from scratch. Central
banks in the world have for many years now established a great
deal of credibility for inflation rates in the vicinity of about
2 percent.

“It will be a very risky transition if we in any way reduced
our commitment to 2 percent or an approximate 2 percent
inflation target. We’re not sure how expectations would react.
It could be that 4 percent wouldn’t be a stable equilibrium and
people would expect even higher inflation. We’re better off
staying essentially where we are.

“Despite increases in inflation a few years ago and declines
in inflation now, inflation expectations in the United States
have been remarkably stable …

“Swap lines played an important role in stabilising global
dollar funding markets during the economic crisis.

“It was very important, as it is important in the current
instance, to be clear that we are not taking any fiscal risks.
Swaps involve no credit risk because they are between central
banks and not between central banks and other parties. They
involve no exchange rate or interest rate risk because the
interest rate is set in advance and the exchange rate is set in
advance.

“We don’t want to necessarily be providing a permanent
service for financial markets.

“There is a good case that would should pressure or
influence banks to better manage currency mismatches or the fact
that they are relying on dollar funding.”

(From speech)

“Policymakers in a central bank subject to short-term
political influence may face pressures to overstimulate the
economy to achieve short-term output and employment gains that
exceed the economy’s underlying potential.

“Such gains may be popular at first, and thus helpful in an
election campaign, but they are not sustainable and soon
evaporate, leaving behind only inflationary pressures that
worsen the economy’s longer-term prospects.

“Political interference in monetary policy can generate
undesirable boom-bust cycles that ultimately lead to both a less
stable economy and higher inflation …

“In some situations, a government that controls the central
bank may face a strong temptation to abuse the central bank’s
money-printing powers to help finance its budget deficit.

“Abuse by the government of the power to issue money as a
means of financing its spending inevitably leads to high
inflation and interest rates and a volatile economy.

“These concerns about the effects of political interference
on monetary policy are far from being purely theoretical, having
been validated by the experiences of central banks around the
world and throughout history. In particular, careful empirical
studies support the view that more independent central banks
tend to deliver better inflation outcomes than less independent
central banks, without compromising economic growth.

“Although quantitative easing, like conventional monetary
policy, works by affecting broad financial conditions, it can
have fiscal side effects: increased income, or seigniorage, for
the government when longer-term securities are purchased, and
possible capital gains or losses when securities are sold.

“Nevertheless, I think there is a good case for granting the
central bank independence in making quantitative easing
decisions, just as with other monetary policies.

“Because the effects of quantitative easing on growth and
inflation are qualitatively similar to those of more
conventional monetary policies, the same concerns about the
potentially adverse effects of short-term political influence on
these decisions apply …

“The costs of undue government influence on the central
bank’s quantitative easing decisions could be especially large,
since such an influence might be tantamount to giving the
government the ability to demand the monetisation of its debt

“The case for independent lender-of-last resort function is
strongest when the associated fiscal risks are minimal.”

Stock Market News
(Reporting by Leika Kihara and Stanley White)

HIGHLIGHTS 3-Quotes from BOJ Shirakawa, Fed Bernanke in Tokyo