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2014 | OriginalPaper | Chapter

Japan’s New Monetary Policy: Some Critical Questions

Author : Franz Waldenberger

Published in: Currency Cooperation in East Asia

Publisher: Springer International Publishing

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Abstract

The Bank of Japan is running an unprecedented historic experiment by doubling its already record high monetary base to more than 50 % of GDP over the next 2 years. The aim is to escape from deflation and achieve 2 % inflation. This chapter questions the main assumptions underlying the new monetary policy: (1) There is little evidence that deflation is a major obstacle to Japan’s prosperity. (2) Japan does not seem to be suffering from insufficient demand. (3) It is not clear how the BoJ can control inflation expectations. (4) Even if it succeeds, it will face the challenge of controlling the negative side effects of rising nominal interest rates, an accelerating velocity of money, lower real wages and a devaluation of the yen that may spur a currency war.

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The “arrows” are first mentioned in the Cabinet Decision “Emergency Economic Measures for the Revitalization of the Japanese Economy”, dated 11 January 2013 (Cabinet Office 2013a). They are further elaborated in the Cabinet Decision “Basic Policies for Economic Fiscal Management and Reform”, dated 14 June 2013 (Cabinet Office 2013b).

It may be noted that monetary policy is not the business of the Japanese government, but of the Bank of Japan (BoJ). However, the newly appointed governor of the BoJ, Mr. Kuroda, was chosen and has positioned himself as a loyal executer of what the government thinks the BoJ should do (The Wall Street Journal Europe, 3 March 2013).

The term was used by Ryuzo Miyao, member of the BoJ’s Policy Board in a speech delivered at the Foreign Correspondents’ Club of Japan, 28 May 2013 (http://www.boj.or.jp/en/index.htm/, retrieved 08.07.2013).

For a definition of the MB and other monetary aggregates used below see http://www.boj.or.jp/en/index.htm/.

The depreciation of the yen as a means to stimulate export demand is not explicitly mentioned although it might well have been intended or accepted as a welcome side effect. Of course an explicit mentioning would have further drawn international criticism (see Sect. 6 below).

Whereas the CPI only measures changes in the price of level for goods and services at the final consumption level of private households, the GDP deflator reflects changes in the price level for all GDP components.

OECD, Economic Outlook, 93 (June 2013), OECD Annual Projections: Output gaps (http://stats.oecd.org, retrieved 08.07.2013).

The present situation is very different from the situation at the end of the 1990s, when Japan was in the midst of a banking crisis following a strong asset price deflation. The quantitative easing conducted by the BoJ between 1998 and 2006 was certainly needed to avoid a deeper recession and seems to have been successful (see Baba et al. 2005).

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Title: Japan’s New Monetary Policy: Some Critical Questions
Author: Franz Waldenberger
Publisher: Springer International Publishing
Book: Currency Cooperation in East Asia
Print ISBN: 978-3-319-03061-6

Electronic ISBN: 978-3-319-03062-3

Copyright Year: 2014
DOI: https://doi.org/10.1007/978-3-319-03062-3_3