Central bank independence is one of the prize features of modern economies. Around the world, central bankers pride themselves on the fact that they’re not beholden to politics, and that they pursue their mandates based on rules, rather than the whim of leaders.
But in the world’s most chronically deflationary modern economy — Japan — the wall between bank and state is quickly crumbling.
Shinzo Abe said he would consider making the Bank of Japan purchase construction bonds directly from the government to tame chronic deflation if his Liberal Democratic Party wins December’s Lower House election and he becomes prime minister. Abe, who heads the largest opposition party, also said he would appoint as the central bank’s next governor someone who agrees with his proposed annual inflation target of 2 to 3 per cent. BOJ Gov. Masaaki Shirakawa’s term of office is set to expire next April.
“We would carry out necessary public investment and have the BOJ purchase construction bonds to forcibly put money in the market,” Abe said Saturday in the city of Kumamoto, referring to special government-issued bonds to raise funds for public works. “We would take fiscal policy steps as well as monetary policy measures to overcome deflation at an early time.”
It’s really hard to fathom something like that happening in the US, a candidate explicitly running on a platform of forcing the Fed to do more QE. Yes, the President appoints the Fed, and Romney let it be known during the campaign that he was not fond of Bernanke, but even he never said anything about making the head of the Fed pursue one policy or another (the closest was probably back in the primary, when Rick Perry said that Quantitative Easing during an election was akin to treason).
Back to Japan, Shinzo Abe has been talking about this for a while, and it was the subject of a section of the latest weekly note from Goldman’s Jim O’Neill
Japan, Abe and the Yen!
Which brings me finally to my theme, and I will be brief. From the Plaza Accord of September 1985 all the way until I joined GS in the Autumn of 1995, I was bullish Yen, and after a brief shift to being temporarily US$ bullish, I returned to being a Yen bull from 1997 until a few years ago. I was quite chuffed with myself for understanding the Yen and it was based on pretty simple stuff, Japan’s persistent and strong balance of payments, especially its trade and current account surplus, and its associated rising equilibrium exchange rate.
All of this has reversed and recently, Japan was reported its first ever current account deficit, or certainly, its first for many decades. They have a very overvalued exchange rate, a collapsing export sector, an unreformed domestic economy, a debt challenge that makes Greece’s seem easy to solve, a central bank that doesn’t try too hard – currently – to reach its inflation target and, once again, a very weak economy. And that is without even getting into the complex issues of its relationship with China and other Asian countries, that in principle should be as good for them as those countries are for the rest of us. Anyhow, we may soon see a general election and a return of the LPD, whose probable Prime Minister has told us now 3 times in the last fortnight that he would force the BOJ, if necessary, to pursue a 3% inflation target. This is the sort of thing that many were advising Japan from overseas in the mid to late 90’s when so many people mistakenly lost of lot of money betting against the Yen. Go get all those guys out of retirement as the time has probably come. The outlook for the Yen is highly asymmetric. It could either waffle around, or could decline sharply in coming months. It is, in my opinion, the most interesting macro thing out there. I have been getting more and more negative about the Yen for the past couple of years, and I have, so far, been wrong, but it seems more and more obvious to me, that the moment is here.
Abe’s promises/O’Neill’s thinking — combined with the aforementioned Current Account Deficit — help to explain why the US dollar has risen to its highest level against the yen in 7 months.
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