They’re at it again.
The Democratic Party of Japan, Japan’s ruling party, had a few swift words for the nation’s central bank on Tuesday. A study group of DPJ lawmakers is advocating a government-set inflation target of 2 per cent, amongst other things, and plans to submit proposals in advance of upcoming legislative elections.
From Marc Ostwald at Monument Securities:
The pressure for the Bank of Japan [BoJ] to effectively monetize Japanese debt, doubtless driven by the thought that if some many other developed nations have gone down the debt monetization route, why shouldn’t Japan? We also note that while hitting the +2.0% y/y CPI target may be a political pipedream, the pressure being brought to bear on the BoJ to operate an inflationary policy is now so enormous as to be almost inescapable, we also take note the effective desire to devalue the JPY by 20% vs. the USD. All of this looks very inflationary for the global economy, and a further large barrel of oil for the risk asset price fire . . .
It’s an interesting point, yet the words blood and stone spring to mind, given that the Bank of Japan has been trying for years now to hoist itself out of a deflationary spiral via quantitative easing (QE).
For, as Nomura economist Richard Koo pointed out in an interview with The Diplomat published last week, there are limits to even the most unconventional of monetary policies:
‘As I indicated in my book, it’s one of those recessions that happens once every God knows how many decades, where monetary policy is largely dead in the water,’ he says. ‘I mean there are no borrowers. And if the money multiplier is zero negative, what can monetary policy do? Those people in the financial sector in Japan are fully aware of this difficulty. But politicians, academics and media who are never faced with the real situation only remember what they are taught in universities, where neoclassical economics always assumes there are plenty of borrowers. They tend to bash the Bank of Japan for not doing more.
‘If the Bank of Japan says, “We’re going to go for an inflation target,” then something has changed dramatically, because everybody knows that the Bank of Japan has no tools to achieve an inflation target with the monetary multiplier zero negative.
‘But for the DPJ government, this is their first time, and with deflation their immediate instinct is to blame it on the BOJ. So they’re going through a learning process too, I think. And at some point they’ll realize that with the money multiplier dead in the water there’s no point in bashing the BOJ.’
Of course — unconventional unconventional policy could produce different results.
We note with interest that banking minister Shizuka Kamei is still pressing for the central bank to underwrite Japanese government bonds, even though the practice is currently outlawed. Doing so would mean buying JGBs directly from the government as opposed to the market, which is what the BoJ’s current form of QE does.
That, in the words of Masaaki Shirikawa, would mean one thing:
“History has proven that central banks directly buying government securities caused severe inflation and dealt a blow to the economy”
Related link:
Is the world’s second-biggest economy on the ropes? – Naked Capitalism
A phoney peace to Japan’s phoney monetary war - Money Supply
Ignore extra deflation, says Bank of Japan – Money Supply