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.

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