TOKYO, Dec 29 (Reuters) - Japan's central bank needs to maintain flexibility in monetary policy if it were to adopt an inflation target sought by the country's new premier given the potential risks to such a move, the central bank's governor told the Nikkei newspaper.
Bank of Japan Governor Masaaki Shirakawa said that the central bank would avoid a 'mechanical approach' were it to set an inflation target, adding that it was vital that the government enact measures to stoke economic growth.
'Implementation that mechanically chases after an inflation target could backfire and hurt economic activity. For example, if oil prices surge and inflation picks up, we could be forced to tighten monetary policy,' Shirakawa was quoted as saying in the interview published on Saturday.
'On the other hand, if inflation stays low even when asset prices rise, as was the case with recent European and U.S. bubbles, ongoing easy policy can fuel a bubble.'
New Prime Minister Shinzo Abe has piled pressure on the central bank to step up its monetary stimulus, even after it loosened policy in December for the third time in four months.
Abe has threatened to change the law which guarantees the central bank's independence if it does not pursue more aggressive easing and has called for an inflation target of 2 percent.
The BOJ has already signalled it may set a higher inflation target at its Jan. 21-22 meeting.
(Reporting by Nathan Layne; Editing by Robert Birsel) Keywords: JAPAN ECONOMY/BOJ
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