Waiting To Inflate

For a truly painful exercise in self-congratulation, check out today’s Wall Street Journal Op-Ed page. It features a piece by Kazuo Ueda, a member of the Bank of Japan’s policy board, touting that institution’s courage in refusing to bow to “political” demands for a more aggressive monetary policy, and argues that the BOJ’s strategy–which has consisted solely of guiding short-term interest rates down to zero–was more sensible than the alternatives proposed by “Japanese politicians” and “the U.S. Treasury.”

Now, we’re all grateful that the Bank of Japan has at least seen fit to keep interest rates down, and it’s comforting that the board’s “intention to support the economy through an easy monetary policy is a firm one.” But what Ueda’s piece demonstrates is that when it comes to fighting deflation – which is now its primary mission – the Bank of Japan barely knows how to walk, and yet it believes itself to be a world-champion sprinter.

There’s little question now that, as Slate’s own Paul Krugman has been arguing forever, Japan has fallen into a liquidity trap. That means that low interest rates are not going to be enough to jump-start its still-recessionary economy. Real prices are falling, not rising, which means people have a disincentive to spend. (Why buy a television today if it’s going to be cheaper tomorrow?) And even cheap money isn’t enough to set off a lending spree by banks that are now carrying hundreds of billions of dollars in bad loans. As a result, what the BOJ describes as an “easy monetary policy” is necessary but hardly sufficient to kick the Japanese economy into gear.

What the BOJ needs to do is precisely what all those exerting “domestic [and] foreign pressure” have been advocating: expand the money supply by printing trillions of yen and using it to buy government bonds from current holders (or, alternatively, it could just give everyone the money). It needs to replace a commitment to steady prices–which central banks traditionally seek–with a commitment to higher prices. It should foster inflationary pressures in order to create an incentive for people to spend and for businesses to expand. But today’s Op-Ed piece suggests just how far from such a policy the BOJ is. Ueda points to the decline in the government bond yield and the rise in the Nikkei as evidence that the Bank’s decision was the right one, and emphasizes that monetary policy alone can’t save the economy.

Ueda may believe this, but if he does, it may be because he doesn’t really understand why expanding the money supply aggressively, however unorthodox a policy, might work. In the most recent issue of Business Week, for instance, the BOJ’s policy board is described as finding it unlikely that “execs and consumers are likely to cheer up and spend just because a dose of inflation makes them feel richer.” But the idea of fostering inflation isn’t that people will feel richer. It’s that spending will make more sense than saving and that, for businesses, standing still will come to mean getting passed by.

It’s possible, of course, that no matter how much money the BOJ sends sloshing around the Japanese economy, Japanese consumers will save instead of spending. Fear–of which there is a lot in Japan–is hardly conducive to buying sprees. But the BOJ’s failure to step up to the plate and take meaningful action is not helping matter. It has a long way to go before it can say, “Well, we tried everything, and nothing worked.”