All hail Goushi Kataoka!
By Scott Sumner
Who’s the world’s best central banker? I’m not sure, but this guy is certainly a front-runner for the title:
Bank of Japan board member Goushi Kataoka said the central bank must expand stimulus further to achieve its price target early, so that prolonged monetary easing does not hurt the country’s banking system, the Sankei newspaper reported on Tuesday.
Kataoka, the sole dissenter to last month’s decision to keep monetary policy steady, said it was premature to debate an exit strategy from its massive stimulus programme, according to the interview by Sankei.
“Our near-term challenge is to think about how we can achieve our 2 percent inflation target, and whether current steps are enough,” Kataoka was quoted as saying.
While the global economy is in good shape, failing to act now and taking too long to hit 2 percent inflation could leave the BOJ without sufficient tools to fight the next crisis, Kataoka said.
“If the global economy is hit by a big shock, there’s a risk things won’t proceed as projected. Before that happens, we need to ensure we return to a position where have room to take policy action when needed,” he said.
This Financial Times article suggests that some other members of the BOJ are leaning toward a tighter monetary policy, because they worry that Japan’s ultra-low interest rates could hurt their banking system:
The yen rose as investors paid attention to Governor Kuroda’s recent speech in Zurich, which specifically noted some of the risks associated with the policy commitment to fix the 10 year government bond yield at zero. Admittedly, he also said very clearly that the main thrust of expansionary monetary policy should continue for a while longer.
This was followed by some hawkish press “guidance”, allegedly from within the central bank. Then, new BoJ Board member Hitoshi Suzuki followed the Governor with a much clearer signal that this so-called Yield Curve Control (YCC) could be watered down next year. If so, it would be the first sign of that the central bank may be contemplating the normalisation of interest rates, albeit with Japanese characteristics.
Trying to normalize interest rates is putting the cart before the horse. When the ECB tried to normalize interest rates in 2011, they created a double dip recession and pushed rates back down below zero.
In contrast, Goushi Kataoka (first link) understands that if you want higher interest rates to assist the Japanese banking system you need easier money:
Kataoka said pushing down 15-year yields would have a much bigger effect in boosting the economy and inflation expectations than lowering short-term borrowing costs. . . .
“We need to avoid a situation where we’re forced to continue current monetary policy as inflation fails to reach 2 percent, and gradually hurt Japan’s financial system,” he said.
Translation: Japan may need to lower interest rates today to avoid having to keep them low for an extended period.
It’s great to see market monetarist ideas being adopted by someone on the board of a major central bank.
And speaking of market monetarist ideas, I was thrill to see this excellent blog post from John Cochrane, where he discusses “8 monetary heresies”:
Heresy 1: Interest rates
Conventional Wisdom: Years of near zero interest rates and massive quantitative easing imply loose monetary policy, “extraordinary accommodation,” and “stimulus.”
Heresy 1: Interest rates are roughly neutral. If anything, the Fed has been (unwittingly) holding rates up since 2008.
We’ve been saying this since 2008. If only the broader profession would have listened.
John has 7 more very interesting heresies, which I’ll consider in a future post.