This The Economist article states the difficulty that recently elected Prime Minister of Japan, Shinzo Abe has been facing in regards to Japan monetary policy. Mr. Abe speaks of “curbing the independence of the Bank of Japan (BoJ) in order to strong-arm Japan out of deflation has won praise from those who think central banks may eventually need to sacrifice their autonomy and monetize government deficits in order to reflate their economies.” But in fact the BoJ showed that there are limits to Mr Abe’s power: the BoJ is an independent central bank therefore the Prime Minister and the government as in general is limited to its monetary policies. A New York Times Nobel laureate and columnist, Paul Krugman, describes this as a “looking-glass realm,” which he optimistically believes that can be an effective change in the policy.
The BoJ has set a goal of 2 percent inflation increase by 2014, as seen on the graph below Japan’s government debt is higher than its real interest rate and GDP. In order for Japan to come into its balance of payment, Japan decided to inflate its currency devaluing the yen.
This inflation target seems to be a very far shot to be reached by 2014 as former BoJ deputy governor, Toshiro Muto, told Bloomberg, this week that “no measure should be considered taboo in hitting the inflation target.” Although it seems to be very difficult for Japan to reach this 2 percent inflation, considering its economical history, the hopes are high that Japan will reach its currency devaluation.
In a follow up article written by the Economist the magazine draws attention to one major potential problem with the desired inflation increase, low wages. If wages do not increase along side prices Japanese citizens will see their real purchasing power decline. Although some firms have made pledges to raise wages, it is unlikely that other companies will follow suit. The Japanese economy will have to demonstrate a consistent increase in inflation and a continued devaluation of its currency to convince companies to increase wages.
ReplyDeletePrime Minister Abe is the driving force behind the increased inflation target; however at the end of the day the Bank of Japan is an independent institution. Unless Mr.Abe is willing to nationalize the central bank, the bank can ultimately pursue its own policies. Additionally, there are upper-house elections in July. If voters begin to feel the negative effects of inflation they might be reluctant to reward the governing party with more seats. Although increased inflation might be good for the Japanese economy in the long term, if the increase in inflation is not carefully managed it could spell disaster. I think Mr. Abe needs a clearer, more defined plan to deal with the side-effects of the more aggressive inflation.
http://www.economist.com/news/finance-and-economics/21573133-shinzo-abe-wakes-up-political-risk-higher-prices-without-higher
This is an ideal representation of what we've been discussing these past few weeks in class. One purpose of the independence of the central bank in any country is to successfully achieve a set of economic objectives without being influenced by constituents or short-term voter preferences, as are government officials. As put toward the end of the first Economist article, the prime minister "may be hesitant to pursue the most controversial ideas because of an upper-house election that he hopes his ruling block will win in July." While he may be praised for his attempts to combat the Yen's devaluation through "curbing the independence of the BoJ," I do not see why his efforts will be more successful than those put forth by the BoJ which is nearly immune to such influences.
ReplyDeleteThe article linked above by Rachel expands on how Mr. Abe's intentions may be purely political. If wages do not increase as the currency does with the 2% increase in inflation, then he may face trouble come election time. The raising of wages reminded me of the classic collective action problem--getting enough firms to raise wages is the key, but many have incentives to default in order to save their own business while putting at risk the economic objective to lift Japan out of its state of devaluation that it has been in for more than a decade.
It would be interesting to compare Japan to other countries around the world and see how inflation is having effects. Japan surely has it's work cut out for them to keep their currency value stable.
ReplyDeleteFrom a more recent article form the Wall Street Journal, the new governor of the BoJ is calling the target inflation rate "flexible" and says that it does not mean that central banks will strick to the target mechanically. He stresses that they will take other economic factors into consideration and will take the appropriate measures to achieve the target inflation rate. The point of this monetary push is to reverse the 15 years of decline. "The stock market soars and the yen has fallen sharply in the global currency markets" this has led to concern "about bubbles, particularly since the 2% target is seen as difficult—if not impossible—to hit, sparking worries the BOJ could roll out even more easing" (WSJ). Though the governor of the BoJ says it could adjust its policy if they saw a bubble forming. This is a very risky policy, as Japan has amassed debt to twice its GDP and has borrowed most of its money from its own citizens.
ReplyDeletehttp://www.spiegel.de/international/business/risky-economic-plan-for-japan-inspires-hope-and-fear-a-894625.html
http://online.wsj.com/article/SB10001424127887323741004578416040906857454.html