Former head of the U.S. Federal Reserve, Ben S. Bernanke, endorsed the Bank of Japan’s extraordinary easing measures to break free of persistent deflation and underlined the importance of coordinating monetary policy with fiscal stimulus.
“Despite improvement in the Japanese economy, I think there’s still a strong case for the Bank of Japan to continue to pursue its target (of 2 percent inflation),” the former Fed chairman said in a speech Wednesday at the BOJ’s Tokyo headquarters.
Since April 2013, Japan’s central bank has maintained a policy involving an aggressive asset purchase program and later negative interest rates, hoping to reach its target sometime around fiscal 2018.
But it remains far from achieving the goal, with consumer prices rising a tepid 0.2 percent in March from a year earlier. The target date for achieving 2 percent inflation has been pushed back five times.
“What tools remain if current policies are not enough? The scope for further easing by Japanese monetary authorities on their own seems limited,” Bernanke said.
“If more stimulus is needed, the most promising direction would be through fiscal and monetary cooperation, in which the BOJ agrees to temporarily raise its inflation target as needed to offset the effects of new fiscal spending or tax cuts” on the ratio of national debt to gross domestic product.
Japan’s debt-to-GDP ratio is by far the highest in the world. The central bank’s massive purchases of government bonds have drawn criticism for effectively financing government debt.
Bernanke also expressed support for the BOJ’s promise made last September to continue its accommodative policy until inflation overshoots its 2 percent target in a stable manner.
The commitment “should help to quell speculation that the BOJ will abandon the fight against inflation prematurely,” he said.
BOJ Gov. Haruhiko Kuroda earlier this month told a Diet committee that it is “very important to explain in an understandable way” how the central bank will exit from its current policy, leading to concerns of an early exit.
Bernanke led the Fed from 2006 to 2014, overseeing its response to the 2008 global financial crisis. During his tenure the central bank embarked on an unprecedented large-scale asset purchase program to stimulate the U.S. economy.
After the end of the program, the Fed, under his successor Janet Yellen, has been slowly raising interest rates as it assesses the strength of the U.S. economic recovery.
Bernanke also said the independence of a central bank will be at risk only if it doesn’t work to meet its mandate. He shrugged off questions about potential risks of hyperinflation.
“It’s like saying I’m seriously underweight but I can’t eat anything because I might get fat in the future,” he said in response to a question about what the BOJ should do to contain the risk of hyperinflation once the price target was reached. “So far, the trouble has been getting inflation up to target, it has not been a problem of arresting inflation above target. We understand perfectly well how to manage that.”
“There’s no way to think about Japan’s situation without thinking hard about how the monetary and fiscal aspects interact,” Bernanke said. “The key thing is the central bank says we’re going to work together: You’re going to do a fiscal program, we’re going to overshoot our inflation target. Those two things are complementary. That is what gives you extra force that the central bank by itself can’t achieve.”
He said that while the BOJ may be reluctant to take such a step, there could be a time when it has little choice.
“In the possible future state that I am contemplating, however, there would be no real alternative other than to abandon the fight to raise inflation and, perhaps, even to accept a new bout of deflation,” he said. “After such a long and valiant effort to end deflation and raise interest rates from their effective lower bound, that would be a most disappointing outcome.”
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