Japan's monetary policy is "very poor" and an explicit target for inflation could help the country arrest a three-year-long deflationary spiral, Federal Reserve Board nominee Ben Bernanke said this evening.
"I have in fact advised the Bank of Japan I think their monetary policy is very poor. One of the benefits of inflation targets is it avoids deflation as well as excessive inflation," Bernanke told a Senate Banking panel mulling the confirmation of the Princeton economist and Fed board staffer Donald Kohn to the US central bank's policy-setting board.
"They should set an inflation target ... of 1 to 2 per cent positive, not negative, inflation. They could achieve that if they had the will and desire to do so," Bernanke added, saying that Japanese authorities were "allowing the economy to drift."
Bernanke said he did not see a significant risk that the United States could stumble into a similar sustained decline in prices.
"While the Federal Reserve needs to pay close attention to the state of the economy and the state of inflation, I think the risks of the US falling into a Japanese-style deflation trap are extremely small," Bernanke said.
He said the US banking system was sounder and not subject to the massive loan problems of Japan's. He added the Fed, "whether it has an explicit inflation target or not, fully understands the importance of avoiding deflation."