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Thursday, December 15, 2005

Right Royal Row Over the BOJ

Things down at the Bank of Japan are hardly calm these days. On one version of events (see yesterdays Tankan) Japan is about - finally - to emerge from deflation, and the BoJ naturally enough wants to 'normalise' monetary policy. The politicians however are non-too clear about this:

"Japan’s ruling Liberal Democratic party will on Thursday urge the Bank of Japan to tie its monetary policy to nominal gross domestic product in an effort to lock in the central bank’s ultra-loose monetary stance for as long as possible."

"The proposal, which marks an escalation in tension between Japan’s politicians and the independent central bank, aims to stimulate above-trend economic growth for up to five years."

"Some senior members of prime minister Junichiro Koizumi’s administration argue that a period of strong nominal growth is needed to repair Japan’s tattered finances."

This balance sheet repair objective wouldn't include monetising Japan's huge government debt, now would it? It is important here to distinguish two issues, escaping from inflation and monetising the debt. I am still skeptical that Japan is actually escaping from deflation, global inflation, among other things, is now turning down, so caution is called for, and I would be opposed to any precipitate raising of rates in Japan. This mistake has been made before. Monetising the debt through inflation is another question. Since Japan's ageing population stand to be the big losers from any sustained bout of inflation, this needs to be avoided. Getting the balance right here won't be easy.

Meantime the IMF has waded in:

The International Monetary Fund on Thursday added its voice to the tense debate over Japanese monetary policy, saying it was too early for the Bank of Japan to consider abandoning its ultra-loose monetary policy.

On Thursday, the IMF’s director Rodrigo de Rato appeared to endorse the politicians’ view that the risks of moving too early were higher than those of moving too late. “We see a need for monetary policy to continue until deflation is completely rooted out,” he said.

“We are not there yet,” he added, referring to the fact that the rate of change in the core consumer prices index, stripped of fresh food, stabilised at zero per cent in October. Some economists say the CPI overestimates inflation, particularly now because of the effects of rising energy prices, which are included in the index.