However, there is no reason to give up on the Bank of Japan. At least that is what the always clever Mikio Kumada is telling us. This Mikio’s excellent comment on my latest comment on the BoJ.
“Just wanted to say that in substance, I share your concerns. And I think it’s important that you raise these questions/criticisms.
I am, however, perhaps, less ideological, and try to look at things in the context of the real world.
Policy makers act in a political/institutional framework, with constraints. And in that context, the BoJ under Kuroda is dong a good job – as good as it gets, so to speak, from a market monetarist perspective.
By the way, yesterday, Kuroda met Abe and both made statements afterwards. Neither of them mentioned the need to keep interest rates low. They said all the other things – Kuroda reaffirmed he will beat deflation and Abe said he will do his part via reforms, but they didn’t make statements about interest rates.
That is another indication that Kuroda believes that higher nominal rates are desirable, and logical. And he may have convinced Abe not to talk about “lowering interest rates” (if Abe needed any convincing). But at the same time, Kuroda can’t yet openly that say he wants rising nominal rates.
My sense is that Kuroda, and also Prof. Koichi Hamada, a trusted advisor to Abe, are open to market monetarist ideas. But they would probably face a hailstorm if they openly say things that are too “revolutionary”. They first have to convince enough people that rising nominal yields are good, as long as real yields (and real wages) remain low, or keep falling during the “reflation” phase. But I would not recommend Abe to talk too much about “falling real wages” publicly ahead of an election, of course. He should just stick to demanding rising (nominal) wages.
I also sense that yesterday’s decline in stocks may have been due to (an erroneous) “disappointment” of investors that Abe/Kuroda didn’t say they want low/lower long term rates.
So, overall, I remain quite optimistic that, over time, the market will come around to accept the view that higher nominal rates are a good thing.”
I find it hard to disagree with Mikio’s comments. So I am starting the weekend being quite optimistic that the BoJ eventually will get it right and if Mikio indeed is right then the market turmoil we have seen over the last couple of weeks will soon come to an end. Fingers crossed.
PS Joseph Gagnon has an excellent comment on the BoJ and the need for not stepping back on monetary easing.
Join the Global Monetary Policy Network on Linkedin here (Mikio is a member).