BoJ in “Targeting The Forecast” Shock

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 indirect taxes
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…
 

+ 1.9%

 

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“.

BoJ Consider, Reject Targeting the Forecast

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”.

Memo to the BoJ: We Can Read the Small Print *And* The Large Print

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.

Yet:

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.

Sayonara, Shirakawa

On the day that Abe nominates Shirakawa’s replacement at the Bank of Japan, I thought I’d share this fun quote from Adam Posen at the Peterson Institute’s recent conference on “Abenomics”:

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 In One Sentence

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.

A Masterclass from the Bank of Japan

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

Bloomberg reports:

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?

Japan’s LDP Proposes 3% Nominal GDP Target

It gets better!  Bloomberg reports:

Abe advocates increased monetary easing to reverse more than a decade of falling prices and said he would consider revising a law guaranteeing the independence of the Bank of Japan. (8301).  In an economic policy plan issued yesterday, the LDP said it would pursue policies to attain 3 percent nominal growth. The party governed Japan for more than half a century until ousted by the DPJ in 2009.

Memo to the “Dangerous Voices”: Remember Japan

Excellent news from the BBC:

Yen dips as Yoshihiko Noda proposes snap elections

Japan’s yen has fallen after Prime Minister Yoshihiko Noda said he was set to dissolve parliament and hold a snap election.

…

There is no guarantee the government would win an election, and the opposition has called for aggressive monetary easing by the central bank.

Its leader, Shinzo Abe, has said the bank should print “unlimited yen” to help fight deflation.

Analysts said such a move would weaken the yen even further.

Ya think?

Mr Abe, the leader of the Liberal Democratic Party (LDP), has said that the bank of Japan (BOJ) needed to set an inflation target of 3% instead of its current 1% goal to help revive growth in the economy.

“If we take power, we’d like to do our utmost to beat deflation,” Mr Abe said. “In doing so, monetary policy would be key.”

He indicated that if elected, he would review the BOJ law that guarantees its independence from the government.

Higher inflation target?  Check.

Print unlimited amounts of money and devalue the currency?  Check.

Put the world’s most inept central bank on a tight leash?  Check.

It’s all there.  Japan, vote LDP!  (I know nothing about Japanese politics, mind.)

Memo to the Dangerous Voices: remember Japan.  Stop fretting about fiscal policy, fix the demand problem at source: bad monetary policy.   Japan is still fighting to get their central bankers to do the right thing, twenty years after the BoJ drove the Japanese economy off a cliff.  I don’t want to still be blogging about UK monetary policy when I’m old and grey.

Lessons from Japan

Marcus Nunes posted some graphs on Japan a while back, but he missed out my two favourite graphs.

First, the graph showing the Bank of Japan’s fairly successful CPI level targeting regime.  The level target they seem to follow is to keep the CPI at around the level of 1993/1994; allowing only temporary upward deviations due to supply-side shocks.  But certainly none of the “base drift” you see from central banks targeting an inflation rate.

Japan CPI Level.  Source: Timetric/OECD

You can see the 2% hike in the VAT rate in 1997, but the BoJ had deflated back down to the old price level by 2002.  The commodity price spike in 2008 shows up, but never fear: the BoJ were on hand to heroically lower the CPI level, right down to 1993 levels by 2011.  Jean-Claude Trichet, eat your heart out.

Marcus’ commenters did not appreciate my sarcasm on this topic.  But if you listen to (most) Keynesian macroeconomists talking about the UK right now, and apply their advice to Japan, should we not conclude that what Japan needs is some more deficit spending?  They’re stuck at the ZLB, so monetary policy “obviously doesn’t work”, and deficit spending is “obviously expansionary”.

That’s not what Keynesian macroeconomists were saying about Japan a decade ago, of course, but let’s pretend Krugman/Bernanke/Svensson never existed.

The second graph Marcus missed was government net debt/GDP:

Japan General Government Net Debt. Source: IMF WEO

Just a teeny bit more deficit spending.  That’s all we need.  Right?

A Plea to New Keynesian Economists

Gavyn Davies, writing in the FT on the dreadful UK GDP data says: “Many economists are arguing that monetary policy is running out of options and that the one remaining hope is to delay the path for fiscal tightening”

This must be the most depressing comment I’ve read in a particularly depressing week.

Can “many economists” please go and re-read Svensson, Bernanke, and Krugman?  Because the idea that monetary policy will “run out of options” at the ZLB is exactly the opposite of what those guys concluded a decade or more ago.

Paul Krugman advised setting a higher inflation target.  Fine.  Simple.  We can do that.  It takes a single letter from HM Treasury to Threadneedle Street to achieve that.  It requires one stamp, not a Budget through Parliament and a thousand civil servants working out how to efficiently allocate capital, and not a penny on the national debt.

(And incidentally, this is the Paul Krugman of 2012 in one of his less partisan moments: “Fiscal policy might be great. But if you’re not getting it you should be doing something on the Fed side and I think that logic becomes stronger and stronger as the years go by. And it’s sad to see that the Fed has largely washed its hands of responsibility for getting us out of the slump.”)

Ben Bernanke deployed the killer argument that it must be true that central banks can always print money and devalue their currency, boosting domestic inflation:

…[One] can apply a reductio ad absurdum argument, based on my earlier observation that money issuance must affect prices, else printing money will create infinite purchasing
power. Suppose the Bank of Japan prints yen and uses them to acquire foreign assets. If the yen did not depreciate as a result, and if there were no reciprocal demand for Japanese goods or assets (which would drive up domestic prices), what in principle would prevent the BOJ from acquiring infinite quantities of foreign assets, leaving foreigners nothing to hold but idle yen balances?  Obviously this will not happen in equilibrium.

And Lars Svensson has a “Foolproof Way” to exit the ZLB, using a price level target.  Note that word, foolproof.  That means even Osborne can’t screw it up.  I see no reason why the Bank of England could not deploy a price level target within their existing mandate.

So why, oh why, oh why, have “most economists” decided that monetary policy is “running out of options”, when even the New Keynesian academics who researched monetary policy at the ZLB gave us a plethora of options?  “Self-induced paralysis” is exactly right.