Embracing monetary change

UNDER the leadership of its new governor, Haruhiko Kuroda, the Bank of Japan has unveiled an impressive package of quantitative easing aimed at lifting the economy out of its deflationary swamp.

Kuroda’s task is to shift inflation expectations. While consumers and businesses believe prices tomorrow will be lower than today, they will continue to hoard cash, hindering growth. Inflation is also needed to boost nominal tax revenues and shrink the public debt.

This is why Kuroda was right to inject a sense of urgency into the aspiration to meet the 2% inflation target, saying he aims to get there in two years. He could have been even bolder, by targeting foreign assets, for example. But he faced two sets of political constraints. Abroad, governments are watching Japan’s monetary manoeuvres closely and would have been suspicious of any deliberate attempts to weaken the yen. At home, Kuroda had to ensure he kept the support of the Bank of Japan’s board. The strong backing he received from his board should encourage him to be bolder if inflation fails to return. But he also needs support from the government. Having rightly pushed for change at the helm of the Bank of Japan, Japan’s prime minister, Shinzo Abe, should now do his part to help the economy.

This means putting together a credible plan of medium-term fiscal consolidation. Domestic investors have so far purchased the bulk of public debt but there is no guarantee they will continue to do so. The government should also pass structural reforms to boost trend growth. The remedy has been known for years.

Just as with bolder monetary policy, now is the time to act. London, April 5