at the average desired rate of inflation. although restoration of the pre - deflation price level by means of a price - level target might be a reasonable interpretation of the boj's price stability objective, i would not want to push the purely legal argument too far. for example, based on a mandate for price stability, i would not ask either the boj or the federal reserve to restore the price level prevailing in their respective nations in 1950! rather, i think the boj should consider a policy of reflation before re - stabilizing at a low inflation rate primarily because of the economic benefits of such a policy. one benefit of reflation would be to ease some of the intense pressure on debtors and on the financial system more generally. since the early 1990s, borrowers in japan have repeatedly found themselves squeezed by disinflation or deflation, which has required them to pay their debts in yen of greater value than they had expected. borrower distress has affected the functioning of the whole economy, for example by weakening the banking system and depressing investment spending. of course, declining asset values and the structural problems of japanese firms have contributed greatly to debtors'problems as well, but reflation would, nevertheless, provide some relief. a period of reflation would also likely provide a boost to profits and help to break the deflationary psychology among the public, which would be positive factors for asset prices as well. reflation - that is, a period of inflation above the long - run preferred rate in order to restore the earlier price level - proved highly beneficial following the deflations of the 1930s in both japan and the united states. finance minister korekiyo takahashi brilliantly rescued japan from the great depression through reflationary policies in the early 1930s, while president franklin d. roosevelt's reflationary monetary and banking policies did the same for the united states in 1933 and subsequent years. in both cases, the turnaround was amazingly rapid. in the united states, for example, prices fell at a 10. 3 percent rate in 1932 but rose 0. 8 percent in 1933 and more briskly thereafter. moreover, during the year that followed roosevelt's inauguration in march 1933, the u. s. stock market rallied by 77 percent. eggertsson and woodford ( 2003 ) have advanced a second argument for a price - level target for japan in an important recent paper on monetary policy at the zero bound. these authors point out ( as have

the private shareholders notwithstanding, the bank of japan is not a private commercial bank. it cannot go bankrupt in the sense that a private firm can, and the usual reasons that a commercial bank holds capital - to reduce incentives for excessive risk - taking, for example - do not directly apply to the boj. indeed, putting aside psychological and symbolic reasons, important as these may be in some circumstances, there appear to be only two conceivable effects of the boj's balance sheet position on its ability to conduct normal operations. first, if the boj's income were too low to support its current expenditure budget, the bank might be forced to ask the mof for supplemental funds, which the boj might fear would put its independence at risk. this consideration by itself should not necessarily make the boj less willing to undertake more aggressive monetary policies, however, because purchasing additional assets with non - zero yields, even if these assets are risky or illiquid, normally increases the bank's current income. second, an imaginable, though quite unlikely, possibility is that the bank could suffer sufficient capital losses on its assets to make it unable to conduct open - market sales of securities on a scale large enough to meet its monetary policy objectives. in short, one could make an economic case that the balance sheet of the central bank should be of marginal relevance at best to the determination of monetary policy. rather than engage in what would probably be a heated and unproductive debate over the issue, however, i would propose instead that the japanese government just fix the problem, thereby eliminating this concern from the boj's list of worries. there are many essentially costless ways to fix it. i am intrigued by a simple proposal that i understand has been suggested by the japanese business federation, the nippon keidanren. under this proposal the ministry of finance would convert the fixed interest rates of the japanese government bonds held by the bank of japan into floating interest rates. this " bond conversion " actually, a fixed - floating interest rate swap - would protect the capital position of the bank of japan from increases in long - term interest rates and remove much of the balance sheet risk associated with open - market operations in government securities. moreover, the budgetary implications of this proposal would be essentially zero, since any increase in interest payments to the boj by the mof arising from the bond conversion would be offset by an almost equal increase in the boj's payouts to the national