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TOKYO (Reuters) - The Bank of Japan's decision to target the yield curve and allow consumer prices to overshoot its 2 percent goal are welcome steps in Japan's long battle to encourage inflation, former U.S. Treasury Secretary Lawrence Summers said.
Targeting the yield curve will keep interest rates low enough to encourage government borrowing, which is needed to help support the economy, Summers told reporters at a seminar hosted by the Japanese central bank.
The BOJ's commitment to overshoot its price target should encourage inflation expectations and is something other central banks should consider, said Summers, now an economics professor at Harvard University.
BOJ purchases of foreign currency bonds are an option to damp excessive yen gains, but could be tough to execute, given opposition to competitive currency devaluation, Summers added.
"I salute BOJ Governor Haruhiko Kuroda and his colleagues on the BOJ board for their clear signal of an intention to approach 2 percent inflation from above rather than below," Summers said.
"The commitment to yield curve targeting was potentially constructive."
The BOJ overhauled its policy framework last week to focus on controlling interest rates after more than three years of aggressive money printing failed to ignite inflation.
The BOJ announced a target for the 10-year government bond yield of around zero. In future the central bank will use its existing minus 0.1 percent interest rate, and the 10-year yield target, to control the shape of the yield curve.
Summers' comments came after the BOJ seminar speech, which partly focused on "secular stagnation" and how policymakers should respond.
Summers revived the concept in 2013 to describe weak demand, low growth and low employment in the U.S. after the global financial crisis.
On Friday, Summers said the natural rate of interest, or the short-term real rate consistent with full employment, had fallen too far in advanced economies for conventional monetary policy to bring rates low enough to create full employment.
Higher savings rates, slower population growth and efficiency gains from technology are driving the natural rate lower, Summers said in his speech.
Government spending will help raise it by lifting inflation expectations, and central banks must commit to keeping rates low enough to make it easy for governments to borrow, he said.
Summers, however, conceded there may not be much more room for central banks to take rates further into negative territory, as consumers could revolt and start hoarding cash.
A suggestion that the BOJ could buy foreign currency bonds was likely to encounter resistance over concerns about a 'beggar-thy-neighbour' currency policy, Summers said.
"I think there are considerable risks in the current international situation to competitive devaluation policies, and so I would be very cautious," he added.
"Buying foreign bonds is something that should be on the table, but I am not sure this is the right moment."
Reporting by Stanley White; Editing by Jacqueline Wong & Shri Navaratnam