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Bank of Japan enters the money trap

Sad to see Japan joining the currency war

The first thing to say about Haruhiko Kuroda, nominated as the next governor of the Bank of Japan, is that he is a very nice man. Whenever I have met him, he has been not only modest and friendly, but also ready, willing and able to discuss policy issues and ready to modify his opinion (unusual virtues among senior Japanese bureaucrats). If Prime Minister Shinzo Abe thinks he has got a Yes man – or “Yes Prime Minister” man – to borrow the language of the British comedy from the 1980s – then he will need to change his mind. My only doubt about Kuroda-san’s personal qualities, indeed, is whether he is tough enough for this challenging role.


But the doubts set in when one looks at the senior team and the direction of policy.

It seems to me that while there is no shortage of goodwill in their efforts to drag Japan out of what is seen as a deflationary trap, the big danger is that they will sink Japan much deeper into what I call the money trap.


That is in many ways the opposite of the deflation trap.


Central banks enter the money trap by making misguided efforts to escape from the deflation trap.


The money trap is a very dangerous place. Don’t go there.


The snake in the grass is Kikuo Iwata, 70, an economics professor at Tokyo’s Gakushuin University. Abe wants “a regime change in monetary policy” to buoy the Japanese economy. Professor Iwata seems to be his chosen instrument. This has caused consternation inside the BOJ staff: “We might do anything but work under Iwata,” a BOJ official is quoted by Asahi newspaper as saying.


Iwata has argued since the early 1990s that the central bank is responsible for the nation’s prolonged economic stagnation. He has pressed the BOJ to increase money supply to lift prices.


According to a report in Jiji press today, Iwata has said that fiscal stimulus is only a temporary measure to stimulate demand until the effects of the BOJ’s 2 percent inflation target take hold. It takes time for monetary policy to lead to an increase in industrial production and jobs, Iwata said, according to a Jiji newsletter.


Kuroda, a former vice finance minister for international affairs, also believes that the BOJ can inject more money into the economy by expanding its purchases of financial instruments. He has talked of “mountains of financial assets, worth hundreds of trillions of yen or even one thousand trillion yen”, that the BOJ can purchase.


The other deputy governor is likely to be Hiroshi Nakaso, 59, a BOJ executive director in charge of international affairs.


The Asahi newspaper reports that Kunio Okina, when chief of the BOJ’s planning and research division, argued that it would be “extremely difficult” to put Iwata’s ideas into practice.


Iwata, who has served as an adviser to Abe, recently published a book titled “Nihon Ginko wa Shinyo Dekiruka” (Can we trust the BOJ?).


Iwata told reporters on Feb. 25 that despite opposition from BOJ officials, the BOJ Law should be revised to commit the central bank to the 2-percent inflation target that Abe insists must be met.


BOJ officials hope that Nakaso will be able to apply the brakes to the ultra-easy monetary policy that the new team may pursue.  Nakaso has been seen as a next-generation BOJ leader. He dealt with bankruptcies of major banks in the late 1990s and the financial turmoil following the collapse of U.S. investment bank Lehman Brothers in 2008. He is believed to share concerns about excessive monetary easing with Governor Masaaki Shirakawa..


The government needs the support of the opposition Democratic Party of Japan for the appointments.


It is a shame to see Japan following the bad examples of the US and UK into currency warfare, but arguably it has no choice.