Thus, we have witnessed a convergence in the monetary policy regimes of our two countries. Today, the two regimes are quite similar in three important respects. Both the Fed and the Bank of Japan place considerable emphasis on an explicit inflation objective, commit the central bank to use all available tools to achieve its objectives, and use forward guidance on interest rates and large scale purchases of long duration assets as the main tools to achieve these objectives. Although there are still some important distinctions in how policy is conducted, much of these relate more to differences in legal frameworks and the current starting point for economic activity and inflation rather than fundamental differences in philosophy. For example, the BoJ’s asset purchases are broader than the Fed’s, extending to equity ETFs (Exchange Traded Funds) and REITs. This option is not available to the Federal Reserve because the Federal Reserve Act sets tighter limits as to the types of assets that the Federal Reserve can purchase. Similarly, current circumstances in the two countries are different, with deflationary expectations still in the process of being dislodged in Japan. The BoJ needs to push up inflation expectations, whereas in the U.S. the current level of inflation expectations is consistent with the long-term objective of the Fed. Therefore, the BoJ, relative to the respective sizes of the two economies, has adopted a purchase program that is more aggressive that the U.S. program.
This program is gradual in nature and aims to reduce inflation, which had reached 91% by the end of 1997, to single digits over the medium term. All we know is that the disinflation program has three components: counter cyclical fiscal policies, structural reforms, and nominal policies. Let me make some comments firstly on fiscal and nominal policies. Turkey’s inflation has a long history. It originated mainly from budget deficits and the way they have been financed, and for this reason fiscal policies should be the backbone of any Turkish anti-inflation program. Calculations indicate that a primary surplus of 4–5% during the first two years of the program should be enough both to relieve the pressure on domestic demand and on domestic borrowing and demonstrate that the fiscal authorities are serious about reducing inflation. A tight fiscal policy will also lighten the burden of stabilization efforts, making a more flexible monetary policy possible. The monetary program is also consistent with these fiscal policies. At the Central Bank we have focused on net domestic assets since the second half of 1998. Bringing these aggregates under control conveyed two basic messages: first, that public sector deficits would no longer be monetized with the Central Bank resources, and second, that henceforward the Central Bank will increase its Turkish lira liabilities only to finance an increase in its net foreign assets.