The new Bank of Japan

Look at that, the Bank of Japan has joined other central banks in announcing an explicit inflation target, and doing all they can to show their credibility for achieving it.


Some will call this a currency war, or “monetization” – but again, this is the Bank targeting a specific inflation target in a forward looking manner.  This is what they should have been doing all along – and given it is a rule, it helps set expectations and acts as a “no-monetization” condition.

Some will say this destroys central bank independence.  I would note that the purpose of independence is to sovle “time inconsistency” in central banks – rule based policy does this fine.  It would only be a problem if the Japanese government tried to force them to violate the rule.

New Zealander’s will complain about the dollar.  Remember here that the BOJ has commited to inflation of 2%pa (where previously it was expected to, on average, be lower).  The return on holding a Yen has become more negative per year … and so the asset price of the Yen much fall.  This is what has happened, however the price inflation will ensure that the real exchange rate trends back to its true level.  Remember, the exchange rate is a price, and we need to think about the primitive causes of any issue in order to figure out if there is one.  The BOJ actually doing normal monetary policy isn’t negative for NZ – although it will sting the bottom line of people trying to sell to Japan in the near term (hola Rio Tinto).

PostsMoney Illusion, Market Monetarist. (Where is the rest of the blogsphere, a credible commitment by the BOJ is actually a massive event … I haven’t seen much in the way of posts yet though.

8 replies
  1. Mark Hubbard
    Mark Hubbard says:

    I have to do more reading, but I thought Abe was dead set on a massive quantitative easing program: am I wrong? Or is the BOJ trying to counter this via inflation rate targeting?


    • Matt Nolan
      Matt Nolan says:

      The inflation target is the inherent constraint on what happens with monetary policy – so it determines the BOJ’s choice of the level of quantitative easing.

      For me, a credible inflation target is the underpinning of appropriate management with a fiat currency – so seeing them do that is good. We may question their credibility – but inflation expectations markets give us the clearest read on that. As a result, next week I should have a peak at those to see whether the responses line up!

  2. Blair
    Blair says:

    Yeah, why isn’t this bigger news? We could learn a lot from the Japanese.

    Good on Kuroda … they may be kicking themselves they didn’t try this earlier. Exit from their fiscal situation will be a balancing act, but I think they will find their primary fiscal balance improving rapidly and this enable them to cover the increase in debt servicing costs. Inflating away a bit of the older debt won’t hurt either.

    • Matt Nolan
      Matt Nolan says:

      “We could learn a lot from the Japanese.”

      They are implementing Aus-NZ style monetary policy, I’m not sure we have anything to learn from this 😉

      • Blair
        Blair says:

        Not monetary policy, but in terms of public transport, life expectancy, restaurants, R&D (they’ve just invented a machine that can read your dreams) there’s a lot they can teach us. And in terms of how to avoid mass immiseration post a financial crisis there’s a lot they could teach the Spanish.

  3. Logan
    Logan says:

    But. But… Inflation targeting is supposed to be dead.

    Hopefully they stick at it so we can make a good comparison between the level and rate of inflation.

    • Matt Nolan
      Matt Nolan says:

      Among economists I believe that “inflation targeting” is dead in one sense – those who had pushed for strict inflation targeting have seen that this may not be quite appropriate!

      However, the flexible inflation target that most mainstream economists were fans of seems to be kicking better than ever. The main area that has sprung up in debate is, as you say, level vs rate targeting for the “flexible price level” (in some sense read this as NGDP.

      I was lucky to have recently come out of university when all this happened, so these movements didn’t seem all that suprising. Good old Victoria University, preparing me for what I needed to know 😉

  4. jamesz
    jamesz says:

    I think this isn’t bigger news because the announcement really happened months ago and the markets moved on the back of that. This is just the mechanics of implementation that everyone expected.

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