E M-M-M-My Kuroda: What The BOJ Is Up To

Investors and advisers have been told that monetary policy accommodation is nearly always stimulative for growth. This has been mainly true in the past, but monetary policy tends to work best when economic malaise is due to cyclical phenomena. What Japan is dealing with are structural phenomena. These include an aging population and two generations who consider low interest rates and slow economic growth as normal. Humans are very adaptable. This is how we became the dominant lifeform on the planet. Faced with a dearth of available credit, low interest rates and modest inflation, Japanese consumers altered their lifestyles and expectations accordingly. Thus, low rates and (potentially) a greater supply of credit will probably do little to boost economic activity, in the long run.

Low inflation or deflation can also have debilitating effects on consumption and growth. That prices are not rising appreciably reduces the urgency for consumers to make purchases. Because inflation and incomes are not rising appreciably, purchasing goods using credit could be seen as disadvantageous. One of the perceived benefits of purchasing with credit is that one can borrow in today’s currency and repay in tomorrow’s lower-valued currency (thanks to inflation). Healthy inflation also usually lowers consumers’ effective debt load as wages often correlate closely to inflation pressures.

In the absence of fiscal reforms and demographic changes, the BOJ has few tools remaining. However, at the present time, the BOJ might be effectively trying to loosen a nut with a hammer. One might be hopeful that central bankers can jar the economy loose from its malaise. They could also merely mangle it, making it more difficult for fiscal policies to repair an economy, if better fiscal policies are implemented at a later date. At the present time, I believe that central banks’ (around the world) abilities to engineer a return to prior levels of economic vibrancy are scant. Demographics, technology and globalization are driving economies. Central bankers can do little to combat these forces. The question that I think will be asked more frequently in the near future is: Should central bankers combat these structural forces?

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David M. Green 5 years ago Member's comment

Do you think central bankers should combat these structural forces? Why shouldn't they?

Tom Byrne 5 years ago Author's comment

It is not whether or not they should. It is whether they can. Central banks have cyclical tools. I.E they can encourage more aggressive lending, borrowing and/or investing. The cost of capital is not the problem. Structural demand for credit is. The Fed has a very string hammer, but it is of little use when the problem is a screw.

Mark Friedmann 5 years ago Member's comment

Nice comment thread, thanks.

Candy Matheson 5 years ago Contributor's comment

Thanks for the informative and well-written article, Tom. With the propensity for Central Bankers to do the heavy lifting these days, there's no incentive for governments around the world to implement any kind of stimulative fiscal policies. This kind of head-in-the-sand approach by world leaders will do nothing, in the long run, to foster trust in the markets...we may see a hard landing at some point in the not-too-distant future where no country can be immune from its fallout, IMHO (I hope I'm wrong, though).

Gary Anderson 5 years ago Contributor's comment

Agreed, but the Fed lifted heavily during WW2 and can lift again if it wants to do so. I just don't think it wants to.

Charles Howard 5 years ago Member's comment

Agreed, I actually just read an article by you about that which I thought was quite good: www.talkmarkets.com/.../the-federal-reserve-financed-ww2-but-cannot-finance-america-now

Gary Anderson 5 years ago Contributor's comment

Yes, Charles, I always argue that the Fed is about bonds and banks. It used to be about the USA in WW2. I hope there are not dark reasons for that change of attitude. I really do.

Tom Byrne 5 years ago Author's comment

The Fed is not only out of tools, it does not should not have the right tools. Headwinds to growth are mainly structural in nature. Fiscal policy mist be changed to increase per capita consumption without encouraging or requiring large sums of household debt.

Candy Matheson 5 years ago Contributor's comment

Is the world the same place now as it was then and would that tool be just as effective (economically, sociologically, technologically, etc.)?...no doubt, lots of factors to consider.