Must-read: Joe Gagnon: “The Bank of Japan Is Moving Too Slowly in the Right Direction”

Must-Read: Joe Gagnon: The Bank of Japan Is Moving Too Slowly in the Right Direction: “Bank of Japan Governor Haruhiko Kuroda’s bold program…

…has made enormous progress, but it has fallen well short of its goal of 2 percent inflation within two years. Now is the time for a final big push…. On January 29, the Bank of Japan (BOJ) announced a complicated program to pay different rates of interest on tranches of deposits that banks hold with the BOJ…. Financial markets quickly reacted positively: Real bond yields fell, the yen fell, and stock prices rose. But much of these gains were erased in subsequent days, probably because markets came to believe the effects of the new policy would be small…. Ten-year inflation compensation is now only 0.5 percent, a clear message that markets expect the BOJ to fail to deliver 2 percent inflation….

A shift from 0.1 to -0.1 percent on a small fraction of BOJ deposits is a tiny move…. The BOJ should move to -0.75 percent on future increases in deposits, while paying 0 percent on the current stock of deposits. The BOJ’s program of asset purchases since 2013 moved the best measure of core inflation (consumer prices excluding energy and fresh food) from nearly -1 percent to more than 1 percent. This is about two-thirds of the way to its goal…. But the BOJ cannot afford to make only tiny adjustments to its policies at this time…. The government of Prime Minister Shinzo Abe could help by raising the salaries of public workers and taking other measures to increase wages recently recommended by Olivier Blanchard and Adam Posen in the Nikkei Asian Review. But the BOJ should not make inaction by the government an excuse for its own passivity…. The BOJ needs to make a convincingly bold move now… lowering its deposit rate to -0.75 percent… step up purchases of equities to 50 trillion yen….

The paradox of quantitative easing in the past seven years is that central banks that were slowest to engage in it at first (the BOJ and the European Central Bank) are being forced to do more of it later than those central banks that embraced it earlier (the Bank of England and the Federal Reserve). If the BOJ does not move boldly now, it will have to do even more later.

February 19, 2016


Brad DeLong
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