Mon­e­tary pol­icy in Ja­pan win some, lose some

The Pak Banker - - COMPANIES/BOSS -

TOKYO:

LESS than a month af­ter tak­ing of­fice as Ja­pan’s new prime min­is­ter, Shinzo Abe has been li­onised by some prom­i­nent Key­ne­sians. His talk of curb­ing the in­de­pen­dence of the Bank of Ja­pan (BoJ) in or­der to strong-arm Ja­pan out of de­fla­tion has won praise from those who think cen­tral banks may even­tu­ally need to sac­ri­fice their au­ton­omy and mon­e­tise government deficits in or­der to re­flate their economies. Paul Krug­man, a No­bel lau­re­ate and colum­nist for the New York Times, de­scribes this as a “look­ing-glass realm” in which virtue is vice and pru­dence is folly. “Ja­pan, of all places, seems to be the first government to fig­ure that out,” he wrote on Jan­uary 18th.

On Jan­uary 22nd, how­ever, the BoJ showed that there are lim­its to Mr Abe’s power. True, the cen­tral bank for the first time set a 2% in­fla­tion tar­get and agreed to open-ended as­set pur­chases, which marks a big ca­pit­u­la­tion; Mr Abe gushed about a “regime change” in eco­nomic pol­icy. Yet on close in­spec­tion, the BoJ fought back as hard as it dared, re­mind­ing the mar­kets how hard it is to launch an eco­nomic rev­o­lu­tion in Ja­pan’s con­sen­sual so­ci­ety.

It gave no in­di­ca­tion that the new 2% “tar­get” was any more reach­able through mon­e­tary pol­icy than the 1% “goal” it re­placed, nor did it give a more mean­ing­ful time frame for achiev­ing it than “at the ear­li­est pos­si­ble time”. The bank’s fore­casts for the un­der­ly­ing con­sumer-price in­dex in 2013 and 2014 (0.4% and 0.9%, re­spec­tively) barely changed from its pre­vi­ous as­sess- ment in Oc­to­ber. In­stead, the cen­tral bank ap­peared to put the onus on the government to hit the 2% tar­get, through struc­tural re­forms de­signed to boost growth.

It damp­ened hopes of un­lim­ited mon­e­tary eas­ing to hit the new tar­get. Its open-ended as­set-pur­chase pro­gramme is not due to start un­til 2014. Even when it does, the size looks rel­a­tively puny com­pared with the ¥101 tril­lion ($1.14 tril­lion) of as­sets it al­ready owns. The BoJ pledged to buy ¥13 tril­lion a month for an un­lim­ited time; but when off­set by re­demp­tions, the net in­crease next year will be just ¥10 tril­lion, less than in both 2011 and 2012.

The bank even ap­pears to have tried to tone down one of the other at­ten­tion-grab­bing mea­sures of Mr Abe’s eco­nomic pol­icy, that of un­bri­dled fis­cal stim­u­lus. A joint gov­ern- ment-BoJ state­ment talked lit­tle of stim­u­lus and in­stead echoed the cen­tral bank’s long-held be­lief that pub­lic fi­nances should be set on a more sus­tain­able foot­ing.

Fi­nan­cial mar­kets, af­ter a bit of ini­tial con­fu­sion, re­acted as if doused by a bucket of cold water. The cur­rency, which Mr Abe’s jaw­bon­ing had helped push down to a 31-month low—be­low 90 against the dol­lar— in a bid to re­vive the ex­port in­dus­try, gained a lit­tle. The stock­mar­ket this week suf­fered its first three-day los­ing streak since the gen­eral elec­tion was called on Novem­ber 14th.

Many Ja­pan spe­cial­ists be­lieve as­pects of “Abe­nomics”—as Mr Abe’s three-pronged prom­ise for re­flat­ing the econ­omy through mon­e­tary, fis­cal and struc­tural reme­dies is known—are valu­able, and that the BoJ was churl­ish to fight its cor­ner so ve­he­mently. For two decades Ja­pan has seen GDP and long-term in­ter­est rates drop as de­fla­tion has be­come en­trenched and its debt moun­tain has grown (see chart). A co-or­di­nated fis­cal and mon­e­tary push may be bet­ter medicine for fix­ing th­ese long-term prob­lems than ei­ther on its own.

Mon­e­tary eas­ing alone does not boost GDP much if the pri­vate sec­tor can­not be per­suaded to bor­row, so the government pro­vides the miss­ing de­mand via stim­u­lus. The BoJ’s as­set pur­chases guar­an­tee that the fi­nanc­ing for that stim­u­lus will be avail­able. Ear­lier this month the government un­veiled a {Yen}10.3 tril­lion fis­cal-stim­u­lus package, which the BoJ reck­ons will help Ja­pan to grow by 2.3% this fis­cal year.

Mr Abe may soon re­gain the up­per hand. On April 8th Masaaki Shi­rakawa’s term as gov­er­nor of the BoJ ends, and the prime min­is­ter has said he will ap­point a re­place­ment with a “strong will to over­come de­fla­tion”. Nikkei, a fi­nan­cial news­pa­per, said re­cently that the favourite among mar­ket-watch­ers in Ja­pan is Toshiro Muto, a former BoJ deputy gov­er­nor who was once nom­i­nated to head the bank by Mr Abe’s Lib­eral Demo­cratic Party. (His can­di­dacy was blocked by a now emas­cu­lated op­po­si­tion.) He told Bloomberg, a news agency, this week that no mea­sure should be con­sid­ered taboo in hit­ting the in­fla­tion tar­get.

Some of the more am­bi­tious ideas be­ing floated, such as us­ing the cen­tral bank to buy for­eign-government bonds to help weaken the cur­rency, would re­quire changes to the BoJ law and cost a lot of po­lit­i­cal cap­i­tal.

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