Japan still feeling sick after too many years of central bank’s bad medicine

Bank of Japan governor Haruhiko Kuroda suffers from the delusion that an inflation rate of 2 per cent will cure all his problems

PUBLISHED : Sunday, 10 January, 2016, 3:07am
UPDATED : Tuesday, 12 January, 2016, 3:30pm

“As I’ve always said, we are prepared to take even bolder steps if we judge necessary. We will do whatever it takes, and I want to strongly say we will absolutely meet our 2 per cent price target.”

Haruhiko Kuroda,

Bank of Japan governor,

SCMP, January 5


One of the drawbacks of appointing career civil servants to head the world’s central banks is that they rarely understand why it’s not a brilliant idea to throw good money after bad.

Admittedly, persistence is sometimes a virtue and proves the right course. Just as often, however, particularly in a competitive financial marketplace, it is not. If you wish to survive there you must be prepared every now and then to say, “Oops, got that one wrong. Sorry. Let’s try another way.”

Civil servants do not work in a competitive marketplace. They do not say, “Oops”. They do not say, “Sorry”. They use words like “strongly” and “absolutely” and “as I’ve always said”. They are sure of themselves and neither people nor facts can tell them they are wrong.

Take the record of the Bank of Japan. In the United States people are puzzled that their central bank, led by an academic (just as bad), has applied the medicine of a zero-interest rate policy for seven years and still the patient is bedridden. How much more puzzled must they be in Japan where, as the first chart shows, Mr Kuroda, a career civil servant, and his predecessors have tried that medicine for more than 20 years with even less of a result. In fact the patient has sickened further.

In a commercial bank the clock would be ticking and others would be waiting in the wings with different ideas if the profit and loss account does not soon show results. Central bankers, however, like the pope, are never wrong and never sacked.

Take also the evidence of the second chart. Mr Kuroda believes that an inflation rate of 2 per cent would solve all his problems. This is a delusion that commonly afflicts central bankers. It may quite naturally lead you to ask why higher living costs is a better thing than stable living costs or even lower ones. Good question and not one to which Mr Kuroda has ever given a satisfactory answer. He is of the view that if a booming economy brings higher prices then it stands to reason that higher prices should bring a booming economy. Mr Kuroda, as I believe I have mentioned, is a career civil servant. But the effort to achieve this 2 per cent inflation rate target has undoubtedly been successful. Consumer prices in Japan are now just a smidgin over 2 per cent higher than they were 20 years ago. Did we forget to mention that this was to be a yearly target? Oh well.

And, in order to achieve this applause-worthy result, the government of Japan has pushed its sovereign debt to the equivalent of 215 per cent of gross domestic product. Put this into perspective. Even the US federal government, with US$19 trillion of debt, has only nudged the 100 per cent mark on this ratio.

Bolder steps, you know, and doing whatever it takes.