A more efficient, and less democratic, Bank of Japan

The Bank of Japan has rejected the proposal, posed by the government, to adopt an inflation-targeting regime, the most renowned monetary policy strategy in recent times, advocated even by Ben Bernanke, the Federal Reserve president. It is the same regime embraced by the Bank of England and, in an incomplete form, by the European Central Bank.

To go after an inflation target would have been an important thing for Japan, beleaguered for years by a stubborn deflation, but the governor Masaaki Shirawaka just said ‘no, thanks’’: “People now see that by focusing excessively on the movement of prices, policy makers failed to spot imbalances in the economy and financial system”, the central banker stated few days ago during a press conference. And it is true that trade globalization has reduced inflation pressures all around the world. In this context central banks have been going on to implement very accommodative policies appropriate only to closed or quasi-closed economies, not aware of the risks of inflating – with such a strategy – financial bubbles.

The inflation-targeting regime today is rightly in question, so Shirakawa has chosen to follow a very innovative path. In December, the Bank of Japan was the first among the major central banks to change – apparently very slightly – its monetary policy “understanding”, stating that it “will assess various risk factors, including accumulation of financial imbalances”, i.e. monitoring asset prices.

This could be a good thing, monetary policy in Japan will be therefore very flexible, but it will chase many indefinite targets; so it will be a discretionary, possibly unpredictable, policy. That strategy will perhaps be efficient, but not immediately accountable, therefore not consistent with a free and democratic society. So the BoJ has rejected its more difficult and more important challenge.