Posted by on October 12, 2016 3:13 pm
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Categories: Bank of Japan Economy Insurance Companies japan John Williams Larry Summers Monetary Policy Reality Swiss Franc Yen Yield Curve

This past Saturday October 8th, Bank of Japan Governor Haruhiko “Peter Pan” Kuroda delivered some prepared remarks on its new QQE with yield control (see here and here) at the Brookings Institute in Washington DC. The conference was attended by “luminaries” like Jeffries’ David Zervos, Princeton economist and Hillary supporter Alan Blinder, as well as many members of the press.

Kuroda began his remarks by praising the BOJ and its innovative yield curve control. In fact, in trying to explain the BOJ’s madness, Brooking’s fellow David Wessel concluded “it must something about the rice.” Kuroda noted that Japan is facing two major monetary policy challenges: 1) inflation expectations are formed in a backward looking manner and 2) figuring out what the link is between the optimum interest rate level and monetary easing. It should be quite comforting for investors to know that the man in charge of running the largest easing program in the world does not truly understand the link between low rates and easing.

The Japanese economist argued that it is still not well understood how inflation expectations are formed by the public and how they can be raised, once they have been anchored to “undesirable low levels.”  To further make his point, Kuroda noted that both the IMF’s Chief Economist Olivier Blanchard, as well as President and punk-rock lover John Williams had suggested to raise the inflation target from 2% to 4%. Mr. Kuroda kindly responded that “the argument that the BOJ can lift inflation expectations simply raising inflation targets seems a little naïve… the BOJ needs to strengthen credibility.” It appears even central bankers can mock the IMF.

Kuroda also found time to critique another beloved Harvard Keynesian, Ken Rogoff, who has notoriously called for a ban on cash. Kuroda stated “the reality is that cash cannot be abolished in the near future”. Somewhere, Larry Summers is shaking under his desk. The BOJ governor also asserted that “asset purchases and cash are not mutually exclusive. The BOJ can proceed with more powerful monetary easing, given an appropriate combination of negative interest rates and asset purchases”.

In a moment of honesty, Kuroda acknowledged that “it is increasingly evident that excessively low and flattened curve can weaken the transmission mechanism. The expected return on pension funds and insurance companies may have a negative impact on consumer expectation. This needs to be examined”. He concluded that with rates at historically low levels, the BOJ needs a new paradigm, one which combines the mechanisms of inflation expectations, negative interest rates, and long scale asset purchase on pegging interest rates.

After the BOJ governor finished his prepared remarks, economist Alan Blinder joined a discussion panel along with David Wessel. Blinder lauded Kuroda’s ambition, comparing it to Paul Volcker’s actions in 1979. In Blinders opinion, the BOJ is switching the focus from the quantity of asset purchases to the price. Essentially, we “don’t care about the trillion”. In Blinder’s opinion, the BOJ should “stop calling its policy QE. This (yield control) is not QE. It would be great if the BOJ would say that early and often.” As Blinder finished his universal praise, his iPhone began to ring. Blinder apologized and acknowledged “I don’t know how to turn this thing off.” The moderator, David Wessel, replied “its kind of like printing money.”

The panel discussed the implications of helicopter money, a widely discussed issue amongst market participants. According to Kuroda, “it’s not quite clear what it means” to engage in helicopter money. In his mind, it means to combine fiscal and monetary policy into one product. “That kind of thing is impossible since fiscal policy is decided by the government and parliament and the monetary policy is decided by the independent central bank”. He did however admit that the yield-targeting policy enables the government to pursue very aggressive spending by the government.

When pressed about the exchange rate, Kuroda continued on with his jovial tone. “Monetary policy does not target the JPY, it is targeted at the inflation rate. The yen is a safe haven currency, but it is not easy to understand why because Japan has a lot of debt. Whatever happens in the market, investors purchase JGB assets. Somehow, the Swiss franc escaped its safe haven status”. When pressed to answer whether JPY appreciation was a problem, Kuroda retorted “it is not a serious problem but from time to time it could result in excess appreciation and it could be disruptive. So it could be a problem. But it may not be a lasting problem. It is also psychological”. Indeed.

Lastly, Kuroda was asked about the BOJ’s credibility (or lack thereof). In his mind, Peter Pan argued that said credibility has not been hurt by its continued failure to reach 2% inflation. “Credibility does not wholly depend on achieving your targets”. Of course not. All you need to have credibility is to believe that “the moment you doubt whether you can fly, you cease forever to be able to do”.

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