Asian Development Bank President Haruhiko Kuroda, who has been nominated by Prime Minister Shinzo Abe to become the next Bank of Japan governor, told a Lower House confirmation session Monday that he will do anything he can to get Japan off its deflation path and that he would like to achieve a 2 percent inflation target in two years.
Given his record, his statements are not surprising. Mr. Kuroda, who served as finance vice minister for international affairs from 1999 to 2003 before becoming the ADB head in 2005, has called for setting an inflation target for many years and has criticized the BOJ for its failure to end the deflation of the past two decades.
But achieving a 2 percent inflation should not become the ultimate goal of the central bank and the government. The ultimate goal of the BOJ and government leaders should be to increase employment, raise the general level of wages for workers and promote economic activitites that are underpinned by people’s greater disposable income.
Prime Minister Abe’s reflationary economic policy is pinned on the hopes that public expectations of higher prices in the future as a result of the BOJ’s bold monetary easing will lead businesses and individuals to increase equipment investment and to consume more ahead of the expected price rises, thus creating desirable conditions for an economic expansion.
Of course there is no guarantee that this sequence of events will happen. In the worst case, prices could just go up while average income remains at a low level. And money that cannot find meaningful investment opportunities may cause economic bubbles.
In the Lower House session, Mr. Kuroda hinted that he will pursue further monetary easing by pressing the case that the BOJ’s current policy of increasing its asset purchase fund to ¥11.1 trillion in and after 2015 is not sufficient. Currently the BOJ is buying only short-term (one-to-three-year) government bonds. Mr. Kuroda said that the BOJ should buy longer-term government bonds such as 10-year bonds as well. But when asked whether the BOJ’s monetary easing will actually lead to increases in employment and wages and to more commercial borrowing, Mr. Kuroda’s answers were rather fuzzy.
Mr. Kuroda must be prepared for difficulty. The more aggressively he pushes monetary easing, the stronger may become the impression that the BOJ is not truly independent from the government. A perception could also arise that Japan is discarding financial discipline. Mr. Kuroda cannot be too careful in preventing the erosion of trust in Japanese government bonds.
Monetary policy alone will not end economic stagnation. The government must also consider how to help improve businesses’ abilities to develop new products that are attractive to consumers at home and abroad, and that are immune to foreign-exchange rate fluctuations. It should also encourage enterprises to raise wages so consumers can loosen their purse strings.