Bank of Japan Not Walking the Talk

February 18, 2010

The Bank of Japan introduced no new measures to counter deflation after meeting over two days for a total of slightly more than five hours.  February has often been a month when Japan’s central bank made dramatic policy initiatives, and Prime Minister Hatoyama’s government has publicly admonished the central bank for perhaps not doing all it could to squelch deflation.  While expected, the BOJ unanimous decision shows conspicuous intransigence.

The central bank’s key uncollateralized overnight call rate is 0.1%, similar to the near-zero levels of the Fed and ECB.  But the 0.1% level is only 40 basis points less than such was at the outset of the Great Recession, and there hasn’t been a reduction in 14 months.  Likewise, the BOJ hasn’t increased outright monthly purchases of JGB sovereign bonds, now at Y 1.8 trillion, since March 2009, and the 50% rise in such compared to mid-2007 represents a much smaller percentage  increase than done between August 2001 and October 2002.  Other measures of quantitative easing like growth in the central bank balance sheet are also much tamer this time than nine years ago and represent less aggressive medicine than applied to other economies that still have positive inflation like the United States, Britain and the euro area.

Deflation in Japan is deeper now than when the Bank of Japan applied more Herculean measures to promote growth.  The GDP deflation was 3.0% lower in 4Q09 than a year earlier, and that was greater than its 1.0% drop in full-2009.  The personal consumption price deflator posted on-year drops of 2.7% last quarter and 2.2% in full-2009.  Core consumer prices declined 1.3% last year, reversing a 1.5% increase in 2008, and were also 1.3% less in December than a year before.  A 1.7% on-year drop in bank loans in January was the worst result since September 2005, and on-year growth in M1 and bank liquidity was at just 1.0% and 1.2%.

The BOJ Policy Board pays lip service to the fight against deflationToday’s released statement concludes:

The bank recognizes that it is a critical challenge for Japan’s economy to overcome deflation and return to a sustainable growth path with price stability… In the conduct of monetary policy, the Bank will aim to maintain the extremely accommodative financial environment.

At his press conference, however, Governor Shirakawa rejected the call by politicians for a formal inflation target of 1% and opined that the best way to end deflation lay in the process of improving productivity.  A plan to reduce fiscal debt would be a good start, he suggested.  Faster productivity actually tends to reduce, not raise, inflation, and the claim that better productivity growth automatically leads to faster economic growth appears dubious in light of Japan’s own experience after rapid productivity gains the latter 1980’s and America’s weak growth last decade after good productivity in the late 1990’s.

The BOJ’s statement did not modify the economic outlook.  The baseline forecast sees economic recovery picking up more steam around 4Q10 as faster exports fortify the corporate sector and trickle down to healthier consumer spending.  Spare capacity diminishes in the process, and the rate of on-year decline in core CPI inflation moderates.  The implication is that monetary policy is already very accommodative and does not need to be made more so.  BOJ officials received ammo earlier this week to take this position, when real GDP was reported to have advanced 4.6% at an annualized rate last quarter.  Take that figure with a grain of salt.  Third-quarter growth had been measured initially at 4.8% but was subsequently revised to 1.3% and then zero.  And the strong estimate for real GDP in 4Q09 reflects a deeply negative deflator.  Nominal GDP only advanced 0.9% annualized and posted back-to-back calendar year declines of 2.0% in 2008 and 6.0% in 2009.

Japan’s politicians have a valid complaint about the central bank not doing enough.  Of course, their sin, a debt of roughly 200% of GDP, is equally serious.  What we seem to have is a standoff.  Monetary officials are instructing the government that if it wants to see more monetary stimulus, something has to be done first on the fiscal side.  This kind of unconstructive stalemate has happened before in Japan, delaying the resolution of the economy’s imbalances.



One Response to “Bank of Japan Not Walking the Talk”

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