|

Sir Norman’s hat and the baldfaced policies of the Bank of Japan

by Noriko Hama

A new executive team is about to take office at the Bank of Japan, but at least two of the incoming members will be wearing hats somewhat different than those doffed by employees of the central bank: The initials on their head gear will spell ABE instead of BOJ.

I have it on good authority that the overseas investment community understands these initials to stand for “asset bubble economics.” Very astute of them. That said, it doesn’t really require that much economic perspicacity to detect the bubbly dangers inherent in the economic policies of Prime Minister Shinzo Abe’s government.

Hats were once a very important aspect of people’s professional attire. This was very much the case at the Old Lady of Threadneedle Street, otherwise known as the Bank of England.

Shiny top hats of mirrorlike brilliance were an integral part of the BOE governor’s dress code. For the governor to appear hatless in public was an outrage quite unimaginable to the gentleman bankers of the City of London.

The first BOE governor to break with this tradition was Sir Montagu Norman, one of the most celebrated figures in the long history of BOE governorship. His term as governor spanned the incredibly extended period from 1920 to 1944. Not only were those years long, they were arguably the most tumultuous days and months in the history of this grand old custodian of monetary order.

Norman’s decision to go hatless came in the early 1930s. It was a sign of defeat. He had just lost a definitive battle with the government. Having fought long and hard to retain the gold standard, he was finally forced to abandon the position in September 1931. The pegging of the value of the pound to gold was seen by Norman to be the very pillar of monetary soundness and resilience.

On the side of the government, it was John Maynard Keynes who led the battle cry, accusing the Bank of England of throwing the country into depression with its stubborn preoccupation with gold. The BOE’s old-fashioned notions of monetary stability were killing the economy, claimed Keynes, calling for the introduction of a fiat currency. Time and tide sided with Keynes.

Norman stopped donning his top hat shortly after these momentous developments. The gleaming hat had been a symbol of the power and integrity of a central baker. He felt no longer worthy of it. The hatless Norman declared the Bank of England had now become a mere instrument in the hands of the Treasury. It was no longer responsible for the value of the pound, and had become an agent of the government, churning out money as and when required to sustain economic growth.

Never mind that the pound was losing value vis-a-vis other currencies. Never mind that Britain was being accused of beggar-thy-neighbor economic management. All the better for exports that the pound should continue to lose value. Such being the reigning sentiments of the government, Norman’s hat was destined for a dusty afterlife in the BOE closet.

History seems to be repeating itself in 21st century fashion in the tussles between the Japanese government and the Bank of Japan. The notable difference, of course, is that the BOJ governor-designate displays none of the frustration and bitterness of Sir Montagu Norman. Far from discarding his hat in disgust, he is keen and eager to wear any hat the government hands him. He will do “all it takes” to accommodate the government’s wishes to overcome deflation. The ABE hat suits him well.

Sir Montagu Norman would turn in his hatless grave.

Noriko Hama is an economist and a professor at Doshisha University Graduate School of Business.