My Advice To The New Head Of The Bank Of Japan

“Haruhiko Kuroda is kicking off his term running the Bank of Japan today, announcing plans to double the Japanese monetary base in order to hit Shinzo Abe's two percent inflation target."
---Matthew Yglesias, Slate: “BOJ's Kuroda Vows To Use ‘Every Means Available’ To Fight Deflation”, April 4, 2013

Well, first of all, when the PM made his big inflationary announcement, I advised readers not to expect much. That is because the Western media don’t understand that the elected Japanese cabinet is less powerful than the unelected Japanese bureaucracy (the “Mandarins”). If you have watched the old BBC series “Yes, Minister”, you will understand, but Japan is actually worse than Britain on this score. Remember that even the divine Emperor was cowed by his cabinet (i.e., his Army ministers) on a number of occasions between 1931 and 1945. Under the pathetic MacArthur Constitution, with the Emperor stripped of his power, no one is in charge; certainly not the elected government. (Have you ever noticed how fast newly-elected Japanese PMs become “discredited” or “unpopular” in the media? That isn’t personal--it’s institutional. It’s to keep them weak. And they routinely do the same thing to the Emperor and his family.)

Abe was able to install a loyal ally, Mr. Kuroda, as head of the BoJ, no mean achievement. And Mr. Kuroda has said almost all the right things (see above). But let’s remember that when it comes to reflationary monetary policy, the whole point is to target outcomes (inflation), not inputs (the monetary base). Doubling the monetary base sounds like a big deal, until you look at modern monetary history. It doesn’t matter how much you grow the monetary base; what matters is an unconditional pledge to create inflation at all costs. The goal is inflation, not a bigger BoJ balance sheet. Why is it that only anglosaxon central bankers can understand this point?

Probably the greatest central banker in world history (albeit a Dutchman) was FDR. When the monetary policy experts told him that there was absolutely nothing he could do to raise farm prices, he ignored them with his Dutchess County noblesse. He decided, on the advice of a collection of land-grant college quacks, to leave the gold standard, and to raise the price of gold until farm prices rose as he desired. Each day he would set a new, higher, gold price. And lo and behold, the 1929-33 deflation reversed, and farm prices started to rise and farm foreclosures began to fall. Unemployment went down and the greatest bull market in history ensued. If you had bought stock on the day of FDR’s inauguration, you would have doubled, and then tripled your money. The wonders of a successful inflation policy. (Note to Mario Draghi: is this too hard to understand?)

Here is all that Kuroda-san has to do. First of all, stop talking about the size of your balance sheet; it’s irrelevant. Just buy gold with yen until the price of gold starts to rise as desired. Once Mr. Kuroda starts to raise the price of gold, his nominal anchor, he will get inflation. It doesn’t matter how big his balance sheet gets, or how much yen M2 grows. Going forward, the only policy objective of the BoJ should be to raise the price of gold.

This is not gai-jin hocus-pocus: the BoJ did this in the thirties, as Bernanke has reminded them.

The World’s Opinion Page

Help support Project Syndicate’s mission

subscribe now;
  1. Television sets showing a news report on Xi Jinping's speech Anthony Wallace/Getty Images

    Empowering China’s New Miracle Workers

    China’s success in the next five years will depend largely on how well the government manages the tensions underlying its complex agenda. In particular, China’s leaders will need to balance a muscular Communist Party, setting standards and protecting the public interest, with an empowered market, driving the economy into the future.

  2. United States Supreme Court Hisham Ibrahim/Getty Images

    The Sovereignty that Really Matters

    The preference of some countries to isolate themselves within their borders is anachronistic and self-defeating, but it would be a serious mistake for others, fearing contagion, to respond by imposing strict isolation. Even in states that have succumbed to reductionist discourses, much of the population has not.

  3.  The price of Euro and US dollars Daniel Leal Olivas/Getty Images

    Resurrecting Creditor Adjustment

    When the Bretton Woods Agreement was hashed out in 1944, it was agreed that countries with current-account deficits should be able to limit temporarily purchases of goods from countries running surpluses. In the ensuing 73 years, the so-called "scarce-currency clause" has been largely forgotten; but it may be time to bring it back.

  4. Leaders of the Russian Revolution in Red Square Keystone France/Getty Images

    Trump’s Republican Collaborators

    Republican leaders have a choice: they can either continue to collaborate with President Donald Trump, thereby courting disaster, or they can renounce him, finally putting their country’s democracy ahead of loyalty to their party tribe. They are hardly the first politicians to face such a decision.

  5. Angela Merkel, Theresa May and Emmanuel Macron John Thys/Getty Images

    How Money Could Unblock the Brexit Talks

    With talks on the UK's withdrawal from the EU stalled, negotiators should shift to the temporary “transition” Prime Minister Theresa May officially requested last month. Above all, the negotiators should focus immediately on the British budget contributions that will be required to make an orderly transition possible.

  6. Ksenia Sobchak Mladlen Antonov/Getty Images

    Is Vladimir Putin Losing His Grip?

    In recent decades, as President Vladimir Putin has entrenched his authority, Russia has seemed to be moving backward socially and economically. But while the Kremlin knows that it must reverse this trajectory, genuine reform would be incompatible with the kleptocratic character of Putin’s regime.

  7. Right-wing parties hold conference Thomas Lohnes/Getty Images

    Rage Against the Elites

    • With the advantage of hindsight, four recent books bring to bear diverse perspectives on the West’s current populist moment. 
    • Taken together, they help us to understand what that moment is and how it arrived, while reminding us that history is contingent, not inevitable

    Global Bookmark

    Distinguished thinkers review the world’s most important new books on politics, economics, and international affairs.

  8. Treasury Secretary Steven Mnuchin Bill Clark/Getty Images

    Don’t Bank on Bankruptcy for Banks

    As a part of their efforts to roll back the 2010 Dodd-Frank Act, congressional Republicans have approved a measure that would have courts, rather than regulators, oversee megabank bankruptcies. It is now up to the Trump administration to decide if it wants to set the stage for a repeat of the Lehman Brothers collapse in 2008.