Egon Spengler: There’s something very important I forgot to tell you.
Peter Venkman: What?
Spengler: Don’t cross the streams.
Spengler: It would be bad.
Venkman: I’m fuzzy on the whole good/bad thing. What do you mean, “bad”?
A speech from BOJ Deputy Governor Kikuo Iwata last night:
More recently in the United States, nominal rates went up, inflation expectations came down, and the expected real rates picked up after market participants started forming a view that the Fed would start tapering the pace of its asset purchases in light of Chairman Bernanke’s testimony on May 22, while in reality this was meant to slow the pace of increase in excess reserves. By contrast, the FOMC’s decision to continue with its quantitative easing on September 18 led to a decline in nominal rates, a rise in inflation expectations, and a decline in the expected real rates (Chart 23).
How beautifully ironic that the BOJ board is able to produce a critique of Bernanke’s tight money. Iwata continues:
What should we make of these episodes? In my view, they owe much to the fact that market participants make judgments on the monetary policy regime after they see changes in the monetary base and the excess reserves, and then form projections for the money stock, the future course of interest rates, and projections for prices.
What matters to interest rates and inflation expectations is the monetary policy regime of a central bank and market participants’ views on the prospects for the money stock based on such a regime. The current level of money stock is irrelevant. It is in this sense that the simple “quantity theory of money,” in which there is a one-to-one relationship between the current money stock and prices, does not hold in practice. Nonetheless, there is a close relationship between the projected future course of the money stock and inflation expectations, and the present rate of inflation is determined based on inflation expectations formed in that way.
A gem from the MPC’s June meeting minutes - yes, I’m a month behind still:
9. Japanese output had grown by 0.9% in the first quarter. It was probably too soon for that to have reflected the impact of recent announcements on fiscal and monetary policy. A durable improvement in nominal demand growth would depend in part on the third aspect of the Japanese policy package – structural reform – but there was as yet little detail on the form that that would take.
That’s a bit scary to read.
1) They believe so much in those “long and variable lags” that they are inclined to dismiss contrary evidence even when it is staring them in the face. And it sure is a good thing our policy-makers carefully studied the Great Depression and what happened to US industrial production in the months after FDR devalued, otherwise we’d really be in trouble. Oh, wait.
2) The path of Japanese nominal GDP depends “in part” on… supply-side policy? Erm, really? What can that mean? That the Bank of Japan does not determine the level of Yen-denominated values even in the long run? Is it a statement of policy - that the BoJ could raise NGDP but it would not be “durable” (“only inflationary”?) unless the government also does supply-side reform? Or is it an endorsement of “creditism”, the BoJ is “impotent” unless mumble mumble banks mumble financial system mumble mumble deleveraging mumble?
Any better ideas? Somebody send nine copies of Bernanke (1999) to Threadneedle St., pronto.
From the summary of “Basic Policies for Economic and Fiscal Management and Reform” from the Cabinet Office in Japan – what macro policy vision does Abe’s Cabinet have?
Macroeconomic vision that Japan should aim for in a new decade of revival
• Labor productivity growth by 2 percent or more in the medium- to long-term with a faster increase in wages than prices, accompanied by increased job opportunities
• Growth of gross domestic product (GDP) by around 3 percent in nominal terms and around 2 percent in real terms, with a higher growth rate to be set for the late 2010s
• Under the conditions specified above, it is expected that nominal gross national income (nominal GNI) per capita will grow by more than 3 percent in the medium- to long-term, resulting in an increase of 1.5 million yen or more in 10 years.
Every three months the Bank of Japan publishes their forecasts for inflation, including the range and the median of board members’ individual forecasts. Here is how the median forecast of CPI ex indirect taxes has changed over the last three meetings, looking at the forecast for Fiscal Year 2014:
|Forecast date||CPI ex
|October 2012||+ 0.8%|
|January 2013||+ 0.9%|
|April 2013||+ 1.4%|
And as of today’s meeting in April 2013, the median of the board members’ forecasts for CPI ex indirect taxes looking two years forward to fiscal year 2015 is… drumroll…
I’d call that targeting the forecast, so great job so far, Kuroda and Abe. Now hold that forecast steady and do not hesitate to print, print, and print some more, until even Richard Koo “believes the lies“.
The Bank of Japan had one vote (Ms. Sayuri Shirai) for open-ended QE this month – and there’s a nice teaser in the minutes:
A different member noted that one possibility would be to immediately put into effect the open-ended asset purchasing method, followed by an extension of the Bank’s projection period by one year, and continue with the virtually zero interest rate policy, as well as the asset purchases, until the median of the Policy Board members’ CPI forecasts exceeded 1.5 percent. However, these two members said that they were simply raising these issues at this meeting and would follow the majority view of the Policy Board.
Let’s hope Haruhiko Kuroda can move the “majority view” towards this oh-so-radical idea of “targeting the forecast”.
BoJ-bashing is too easy.
Incongruous statements from the Bank of Japan last night, part one:
For the time being, the year-on-year rate of change in the CPI is expected to turn negative due to the reversal of the previous year’s movements in energy-related and durable consumer goods, and thereafter, it is likely to be around 0 percent again.
The Bank recognizes that the inflation rate consistent with price stability on a sustainable basis will rise as efforts by a wide range of entities toward strengthening competitiveness and growth potential of Japan’s economy make progress. Based on this recognition, the Bank
has set the price stability target at 2 percent in terms of the year-on-year rate of change in the CPI.
And part two;
Under the price stability target specified above, the Bank will pursue monetary easing and aim to achieve this target at the earliest possible time.
Yet the footnotes show they voted against easing policy right now:
With regard to JGB purchases under the Asset Purchase Program, Ms. S. Shirai proposed to immediately put into effect the open-ended asset purchasing method and consolidate them with those conducted for facilitating money market operations. The proposal was defeated by a majority vote. Voting for the proposal: Ms. S. Shirai. Voting against the proposal: Mr. M. Shirakawa, Mr. H. Yamaguchi, Mr. K. G.
Nishimura, Mr. R. Miyao, Mr. Y. Morimoto, Mr. K. Ishida, Mr. T. Sato, and Mr. T. Kiuchi.
Mr. R. Miyao proposed to continue with a virtually zero interest rate policy until the Bank judges the achievement of the price stability target to be in sight. The proposal was defeated by a majority vote. Voting for the proposal: Mr. R. Miyao. Voting against the proposal: Mr. M. Shirakawa, Mr. H. Yamaguchi, Mr. K. G. Nishimura, Mr. Y. Morimoto, Ms. S. Shirai, Mr. K. Ishida, Mr. T. Sato, and Mr. T. Kiuchi.
Koichi [Hamada] cited our late colleague Mike Mussa, who of course in addition to being brilliant, was the master of the quip and he at one point had said, “Putting Alan Greenspan in charge of bank supervision was like putting a conscientious objector in charge of the Marine Corps.”
Governor Shirakawa or Governor Hayami as head of an expansionary monetary policy is the same thing. They both took office and insisted that they could not do anything and that any attempts they made would fail and that when they made attempts that their heart wasn’t in it and it was contrary to their principles and it would only prove that their attempts would fail. Now, monetary policy is not merely a confidence game, but this meant that at every level throughout the BOJ and every time there was an innovation or an attempt at new policy, the governors themselves were undercutting it.
I have edited out a couple of errors in the transcription…. central bankers who insist that they cannot “do anything”, and anyway “doing something” would be a really bad idea? Does that sound familiar?
There’s a presentation from Abe’s adviser Koichi Hamada in there too (slides here), though it is a little hard to follow. He says the stock market rally and Yen devaluation since November disprove the arguments of those who argue “monetary policy doesn’t work” (right on), and also debunks the “currency war” rubbish; what would be really damaging is trying to align Japanese monetary policy with the needs of the American economy, rather than the domestic economy of Japan.
Almost everything you need to know is in this one simple sentence, via Lars:
Japanese shares rose, with the Nikkei 225 Stock Average heading for the highest close since September 2008, as the yen fell after Bank of Japan Governor Masaaki Shirakawa said he will step down ahead of schedule.
If monetary policy in Japan was “impotent” would this happen? No.
If the discretion over the direction of monetary policy exercised by central bankers is irrelevant, would it matter if your central bank governor leaves a few weeks early? No, no, no!
Read Lars for more.
There seems to have been some problem with the Bank of Japan’s translation department this morning. Fortunately, I’ve discovered a secret feature of Google Translate which lets me translate from Central Bankerese into English. This is how today’s BoJ announcement comes out:
The Bank of Japan conducts monetary policy based on the principle that the policy shall be aimed at “achieving price stability, thereby contributing to the sound development of the national economy.”
When we say “price stability” we mean exactly that. No overall movement in the CPI level. We hope this is very, very clear. Mr. Shinzo Abe wants us to set a 2% inflation target. Who does he think he is?
Mr. Abe talks about “targets”, but we like to talk about “aspirations”. Specifically, “vague aspirations”. What we really want is 0% inflation, as we said. But because Mr Abe keeps nagging us, we are putting out this announcement to keep him happy. So we’ll state clearly today that we have a vague aspiration towards hitting a 2% inflation target.
Because Mr. Abe is not content with mere announcements, he also wants us to take action. He is keen on this idea of printing unlimited amounts of money. So we’ll do that. But not today! Oh no! Not tomorrow, either. Nor next month. Don’t be silly. In fact the printing money business will have to wait until January 2014. We are quite busy here at the Bank of Japan, you know!
By delaying the printing money business until 2014 we are sure you will appreciate that we have not compromised one iota in our intent to hit our 0% inflation target. This also gives us a lot of time to think up some new excuses about why it’s really difficult and/or dangerous to hit a 2% inflation target. Hopefully that annoying guy Abe will be gone by then as well.
This announcement continues in the long tradition of obfuscation and failure which we embrace here at the Bank of Japan. Our motto remains: “The Worlds’ Most Inept Central Bank”.
Governor Shirakawa and friends
Governor Masaaki Shirakawa and six of his nine fellow board members voted for a 2 percent inflation target, to be achieved “at the earliest possible time” — a pace not sustained in Japan since the early 1990s. While judging that the “economy remains relatively weak,” and that consumer prices will be flat for the time being, the BOJ refrained from adding any immediate stimulus.
Consumer prices are expected to remain flat, and they’re not doing any stimulus. Who could claim they are trying to inflate?