The Enigma Of Japanese Monetary Policy

The Nikkei index fell sharply today. Paul Krugman analyzed the various explanations and concluded that the sell-off was due to a lack of faith in the BoJ’s 2% inflation target. Krugman is correct. Readers will recall that I have never bought into Abenomics and the BoJ’s overnight conversion from deflation-targeting to inflation-targeting. Why? Because the BoJ is a deeply confused and intellectually incoherent organization unable and unwilling to obey its democratically-elected masters.

If you are a monetarist (which Krugman sort of is) you will know that the stock market is about monetary policy and little else (besides creeping marxism, which is what’s wrong with Krugman).

Only someone ignorant of Japan would ever believe that the BoJ will do whatever it takes to achieve 2% inflation on any non-Oriental timeframe. The BoJ is guilty of the twin monetary sins of input-only-focus and dogged incrementalism: “If I turn the hot water faucet by one centimeter a month, I will be able to take a hot shower at some time in the future.”

The BoJ is right on track, Japanese-style, because it is indeed expanding the monetary base; it is turning the hot water faucet at one centimeter a month. The water will someday get hotter. But unfortunately, right now the water is getting colder. Hot shower a few years off.