Macroscope | As the Federal Reserve and ECB follow in the Bank of Japan’s footsteps, they skirt some inconvenient truths

Japan’s central bank pioneered the policy of zero interest rates and easy money, now seen as a panacea for the world’s economic ills. However, the side effects of this model are not fully known, nor how long it can continue without posing system risks

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Haruhiko Kuroda, governor of the Bank of Japan, listens to a question after delivering the Michel Camdessus Central Banking lecture at the International Monetary Fund in Washington on July 22. Photo: Bloomberg

Published: 7:00am, 5 Aug 2019Updated: 7:17am, 5 Aug 2019

It would be hyperbole to suggest that the world was hanging on the words of Bank of Japan governor Haruhiko Kuroda when he delivered the Michel Camdessus lecture in Washington on July 22. But seeing that the bank pioneered the great monetary easing experiment 20 years ago, it was not only central bankers who were anxious to hear what he had to say.

Stock, bond, real-estate investors and businesspeople everywhere were eager to see whether Kuroda would endorse the new monetary orthodoxy that has allowed them to make a financial killing since the United States Federal Reserve, the European Central Bank and others followed in the BOJ’s footsteps.

We are, after all, living in a strange new world where it seems that printing money has become a panacea for the world’s economic and financial ills. So, was the BOJ governor going to endorse the experiment or warn others off?

He essentially argued that there is no reason to fear treading further into the world of zero or even negative interest rates. They are not contrary to the laws of economics and it is OK to press on with monetary easing, he suggested, while hinting at possible stings in the tail.

This must have been music to the ears of US President Donald Trump, who neither knows nor cares much about economics so long as the US economy “goes up like a rocket” on his watch. Kuroda’s words were no doubt soothing too, to those ordinary mortals who, to use his own words, “do not always pay close attention to monetary policy”.

Many central banks, he observed “face a common challenge of how to raise inflation”, the assumption being that, without the expectation of inflation, and far more so if there is disinflation or deflation present, consumers will have little incentive to consume and investors to invest because it will be cheaper to do so tomorrow.