Commentary / Japan

Give the BOJ a break

by Daniel Moss

Bloomberg

It’s too soon to write off the Bank of Japan.

The central bank has been a frequent target of criticism after two decades of ultraeasy money failed to achieve a full recovery in the world’s third-largest economy. The latest carping comes after the BOJ cut its inflation outlook again on Wednesday, extending a record of overestimating price growth in its projections.

The fault-finding is unfair. The country is better off with loose money than without, though this is hard to see on a month-to-month basis. Things might be considerably worse if the central bank took a different approach.

The setbacks the BOJ faces are shared by other major central banks: inflation going the wrong way and a less ebullient international outlook. Officials everywhere have spent considerable time lately weighing these challenges.

On a deeper level, BOJ Gov. Haruhiko Kuroda is battling historical currents that might be beyond the reach of monetary policy. They reflect decades of psychological change in Japanese society about the direction of prices and the economy in general. That doesn’t mean the bank shouldn’t try, and there’s some evidence its stance has had an impact. Few people stop to ask the counterfactual: How much worse would things be if the BOJ just accepted defeat and walked away?

Let’s look at the surface first. The bank’s sin this week was to lower projections for inflation and growth at its meeting to set interest rates and assess the economic trajectory. Japan’s boffins have a poor record as forecasters, the complaints say.

The BOJ is hardly the only central bank to come up short, not just on meeting its inflation target of 2 percent but on estimating where consumer prices will be. Was Kuroda too optimistic? Sure. He’s in good company: the U.S. Federal Reserve has consistently undershot its 2 percent target since adopting it in 2012. Inflation numbers have also been trimmed by the European Central Bank.

Other challenges described by Kuroda are highlighted with frequency by his peers: a global economy that’s off the boil, market tumult, Brexit and trade friction. Fed Chairman Jerome Powell’s much-maligned December news conference toured some of this landscape but was drowned out by U.S. President Donald Trump’s broadsides and the notion the Fed was insufficiently dovish.

The deeper stuff has roots in psychology. An entire generation of Japanese people has grown up without any memory of high inflation; they are more familiar with deflation or microscopic price increases. Elders who remember the hyperinflation that followed World War II and the price spikes of the 1970s are starting to fade. This was the subject of a fascinating 2018 working paper from academics at Hosei University and the University of Tokyo.

Sounds intractable, but monetary policy has moved the needle, write authors Jess Diamond, Kota Watanabe and Tsutomu Watanabe. Inflation targeting has had an impact on young and old, albeit in different ways. Among older folks, it reduced inflation expectations; critically, among the younger crowd, inflation targeting has raised expectations. People surveyed who were familiar with the BOJ and Abenomics also had expectations of higher inflation.

Another heavy lift for Kuroda is the “stickiness” of pricing among a majority of the 588 items that comprise Japan’s consumer price index, Watanabe and Watanabe found in a separate 2017 paper.

Inflation expectations are anchored around zero in Japan, less than the 2 percent in other major economies like the U.S., the duo found. “Put differently, whereas in the United States and the other countries the ‘default’ is for firms to raise prices by about 2 percent each year, in Japan the default is that, as a result of prolonged deflation, firms keep prices unchanged,” the researchers summarized. The rot set in during the second half of the 1990s and has been tough to shift.

Policymakers the world over love the term “headwinds.” Kuroda has more than his share, both garden variety and gale force.

The BOJ is too easy a mark. Let’s have some perspective before rushing to condemn.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics.

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