The Death of the Bank of Japan

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If you go to Tokyo and make your way to 2-1-1 Nihonbashi-Hongokucho, you will find yourself standing in front of a building that used to house the Bank of Japan. If you walk inside, the security guards and the reception will still claim that this is indeed the BoJ, but that is in fact no longer true.

The Bank of Japan has ceased to exist in its originally intended role, which is to be an independent entity that ensures the stability of the money supply, and possibly also the level of inflation and other variables such as employment levels. The latter two, and certainly employment levels, are more recent additions to the remit of central banks, but let us leave that aside for now. Monetary stability and inflation management is by far the most important responsibility of any central bank.

The emphasis here is on the word ‘independent’. Ever since Shinzo Abe became Prime Minister, the Japanese government has had its own representative sitting in on BoJ meetings. This might seem innocent enough, until you take into account that more or less from day one of the new administration, the government has put pressure on the BoJ to loosen its monetary policy even more than it has done for over a decade now (and with very little to show for it as far as growth and an end to deflation is concerned).

Former BoJ governor Shirakawa was reluctant to open the liquidity valve even further than he (and several predecessors) had already done, and in March he was finally replaced by Mr Kuroda, who it is fair to say has now already made a name for himself.

What is important to understand is that Mr Kuroda is only BoJ governor in name. In anything but name, he is the extension of the government of Shinzo Abe. In fact, in extremis one might argue that for all intents and purposes he is a very senior member of the Liberal Democratic Party (LDP). What this really means is that the independence of the Japanese central bank no longer exists, and so effectively the BoJ has ceased to exist.

The worrying part of this is of course that the BoJ has  been completely politicised, and once you effectively hand over control of the money printing presses to elected politicians, and take it away from independent monetary bureaucrats, you have to expect that political priorities will override economic and monetary priorities. That is not to say that the two are not closely tied together – they certainly are in Japan’s case – but one can no longer maintain a realistic expectation that monetary policy will be conducted in accordance with purely monetary goals. In addition, central bank governors aren’t up for re-election by public vote in the same way that politicians are. The independence of the BoJ has now been undermined, if not eliminated altogether.

The effectuation of the latest and most dramatic chapter in the multi-decade long Japanese economic and monetary saga,i.e massive monetary stimulus, is not only a signal that the situation has become untenable(which it clearly has), but that there is finally a realisation of this fact within the Japanese political establishment. They have known for years that they were heading further and further down a road that was obviously a dead end, but they never had to deal with it because there was always more road. They have now almost run out of road, and they don’t know where to go.

For years the problem of deflation and perennially low (or even negative) economic growth in Japan has been attempted addressed using fiscal stimulus and then monetary stimulus. The fiscal stimulus has been entirely ineffective, at least in any permanent sense. Monetary policy has been quite supportive but never aggressive to the extent we are witnessing now. They are now going for maximum aggression. The BoJ effectively only has one thing left to try, and they are trying it. They have one bullet left in the gun, so that is the one they are using.

Another analogy that has been bandied around quite a bit lately, but that applies perfectly to the BoJ is this: “If all you have is a hammer, everything looks like a nail”. The BoJ only has monetary stimulus as a weapon, so guess what they are doing, even if there is no real evidence that it has worked in the past, and even if it entails a very real risk that it will ultimately push Japan over the edge and send it plunging down into the chaotic reality of sovereign debt default.

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