Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.
In global finance and economics, it is almost always the rates of change rather than the absolute level that matters. Humans reward growth, not stagnation. Yes, size matters, but growth is so much more exciting. It’s the dream of being big in the future that counts. And on the global stage, whether you like it or not, being bigger and faster than the other economies is still what’s needed to attract capital and rewards.
This relentless race also applies to the complex world of policy making in general, and monetary policy in particular. What has been hurting Japan is not that they are doing nothing, but that they have been doing it less aggressively than the rest of the world. Just listen to the Federal Reserve continuing to make strong commitments that they will continue to be there and will continue to act pro-actively because the U.S. economy still faces strong headwinds. In contrast, the Bank of Japan (BoJ) is ensnared in a “stop-and-go” pattern—in November of last year they upgraded their growth outlook and openly talked about the need to “exit” from quantitative easing and money printing. But then in December they turned around and started talking about deflation risks and decided to actually increase monetary accommodation. Clearspeak: Japan suffers from policy inconsistency and a lack of persistent and aggressive pursuit of a defined policy goal. Stop-and-go does not win world records in the long-distance race we’re all in.
Monetary policy is not as mysterious as people sometimes make it out to be. The central bank of any country controls the price of money—interest rates—by printing money and buying either public sector or private sector securities. There are no limits to “mechanical monetarism,” i.e. the printing of money. Technically, the central bank could buy all the government bonds that are issued. And if they want to, they could buy any private sector assets as well. Case in point: Remember when then BoJ Governor Toshihiko Fukui started an equity-buying program within a month of being appointed by then Prime Minister Junichiro Koizumi. The unprecedented move by the central bank to buy equities from private companies sent an incredibly strong message. Yes, the BoJ has gotten serious about wanting to fight deflation. Make no mistake, where there is a will, there is a way. And remember that any central bank is a far more powerful operator than any private enterprise: They own the printing presses and they do have an information advantage. Of course, there is institutional best practice, basic principle and culture, but if central banks want to act, they can.
But should they?
Perhaps the best-ever answer to this was given by former BoJ Governor Masaru Hayami in one of the parliament sessions. Called in to testify just after another re-start of a quant-ease initiative in the late ’90s, he said–and I quote from memory, “We are doing all we can, but trust me, it is not going to work.” Clearspeak: The BoJ does not believe in mechanical monetarism, i.e. growing base money and the money supply will “not” lay the foundation for future growth.
Are they wrong?
To answer this one, you can either hide behind some dogma (the great Milton Friedman says inflation is always a monetary phenomena, so what is the BoJ waiting for?), or you can jump onto an infinity loop of possible empirical observations that justify, perhaps, that Japan is a special case. Neither is helpful, in my view, so let me give you some quick thoughts on my personal thinking on this one (and I’m happy to discuss this further over a glass of wine next time we meet).
The BoJ law stipulates two principal goals that must guide BoJ operations: One is price stability, the other is financial system stability. I think it is reasonably clear that the BoJ has failed to achieve the first one. Japan is stuck in de-facto disinflation rot, with all major markets of the economy–land, labor, capital–showing consistent price declines. Make no mistake, it is this adjustment of the major factor markets that is the macro-driver forcing price deflation in the various goods and service industries.
What this really means is the following: Without wealth effects from rising factor prices –land, labor, and capital–you cannot get out of deflation in the goods and services industries.
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