TOKYO: The Bank of Japan (BoJ) is free to end its ultra-loose monetary policy when it sees fit, but should accompany the announcement with the release of a numerical target for price stability, according to the ruling Liberal Democratic party's policy chief. Hidenao Nakagawa, chairman of the LDP's policy research council, said in an interview with the Financial Times: "The [timing) of the end of quantitative easing is the responsibility of the BoJ." That marks a significant softening of the LDP's position a few months ago, when there was talk of stripping the bank of its independence should it end unorthodox policy too quickly. The more relaxed attitude follows a flurry of strong economic indicators and repeated assurances by the central bank that it would leave interest rates at zero long after it ended quantitative easing. There is intense speculation that the BoJ may begin to mop up excess liquidity after its forthcoming board meeting, following the latest release of data on showing that the core consumer price index had risen 0.5 per cent in January. Even if the central bank waits until next month, it must quickly decide what guidance to offer markets on future monetary policy. Mr Nakagawa said the bank should release a numerical target for the consumer price index. "To have a transparent target, numbers are better than just a message. That is more credible for the markets," he said. "We also need a target that is easy for the Japanese people to understand." Most BoJ officials favour the current approach of the US Federal Reserve, in which the US central bank issues statements to indicate the direction of policy. But many politicians, arguing that the bank needs to cooperate more closely with the government to promote growth, are urging the BoJ to provide some numerical guidance. Mr Nakagawa said an initial target could be as low as 0.5 per cent, although this could rise to 1.0-2.0 per cent or 2.5 per cent over time. His suggestion of 0.5 per cent, a low target that should be fairly easy to achieve, could be an effort to compromise with a central bank worried about setting policy goals it might struggle to achieve. Kaoru Yosano, the economy minister who is close to BoJ thinking, has articulated the perceived dangers of a numerical target, saying: "Numbers can take on a life of their own so they must be approached with caution." Under quantitative easing adopted in March 2001, the bank floods the market with far more liquidity than needed. The end of the policy would mean reducing liquidity from the current ceiling of Y35,000bn ($301bn) towards -- though possibly not right down to -- the estimated Y6,000bn required to drive overnight rates to zero. That process is expected to take about three months.
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