Like two samurai facing each other in a duel, the Bank of Japan and parts of the Diet, Japan’s parliament, are fighting over how to revive the country’s long-ailing economy. While growth was fast in the first quarter of 2012, this spurt was the result of several one-off factors which are unlikely to lead to a more sustained acceleration.
To get the economy going again, some in Japan’s parliament would like the central bank to loosen its monetary policy even more than it has done so far. The BoJ should add to its existing Y70tn ($890bn) asset-purchasing programme and stretch it in ever more unorthodox directions. The International Monetary Fund has backed this position, arguing that the BoJ should buy long-term government bonds.
Such calls have so far been ignored by the BoJ, which last week decided to leave its easing programme untouched. This may have been a way for the BoJ to keep its powder dry, were the situation in the eurozone to degenerate and cause financial turmoil. But the BoJ is also worried that bolder action may be seen as a monetisation of the country’s debt.
These worries are misplaced. The BoJ may well be buying about a third of the new issuance of government debt this year. But monetisation only occurs when the central bank decides to cancel the debt, something that the BoJ has no intention of doing. As for the inflationary consequences of quantitative easing, in deflation-plagued Japan a moderate increase in prices can only be a good thing.
Where the BoJ is right, however, is in its belief that monetary policy is no panacea for Japan’s woes. In fact, it has become politicians’ favourite excuse. Calling in the BoJ governor to parliament to explain his inaction (it has happened 20 times this year) is much easier than passing necessary but politically difficult reforms.
These include measures to raise women’s labour force participation, as well as incentives to get corporations to invest more. Then there is the issue of stabilising the country’s public debt, the second largest in the world. Parliament is raising the consumption tax from 5 per cent now to 10 per cent in 2015. This could be complemented by wealth taxes targeted at the cash-hoarding elderly, which would help fiscal consolidation with a lesser impact on consumption.
The BoJ should not dig its heels in and avoid the further monetary loosening that is beneficial to the economy. But if politicians want to prompt the BoJ to act, showing commitment to reform is more helpful than a series of pep-talks.
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