Adam Posen’s interesting views on BoJ Independence and Japanese economy…

Adam Posen (earlier at BoE MPC and now back in PIIE) shares his views on the topic (Part – I and Part-II).

Interestingly he says, new Japanese PM Shinzo Abe asking BoJ to stimulate economy is justified:

Prime Minister Abe is somewhat radicalized. While he is talking about doing some fiscal policy expansion plans of the sort that the Liberal Democratic Party is famous or infamous  for, he is also putting a great deal of pressure on the Bank of Japan to do something about the  overly strong yen and more importantly, about the ongoing deflation in the economy. And thirdly, he’s talking about doing some things to stimulate private investment, which has been down as well. The really fresh stuff is the monetary side, and frankly, I think it’s justified.

Steve Weisman: As in the United States, the Bank of Japan is independent. How can a new political leadership change the policy, and what direction does he want to take it in?

Adam Posen: Well the BOJ—the Bank of Japan—is indeed independent by law. What independence means, here at the Fed or in Japan or in Europe, is that the government doesn’t month to month sit there and say, “You’re going to vote this way this time.” And most importantly, it means they can’t fire the governor—whoever’s sitting there—and they can’t force the central bank to buy bonds directly.

That’s what defines central bank independence. But once you get past that, you are of course, allowed to say, “I like or I don’t like this policy,” the same way you would about a general or the FBI or about the Food and Drug Administration, which are independent agencies as well. You are allowed to comment on their performance. And particularly with central banks, you’re allowed to evaluate what their goals are. Most central banks have, at the moment, some form of what’s called inflation targeting — whether explicitly or not.

And as the great Stan Fisher [former First Deputy Managing Director of the International Monetary Fund] pointed out, nearly twenty years ago now, you can reconcile it by having goal dependence, meaning that the elected officials every few years tell you what the goal of your target should be for a central bank, but leaving them instrument independent, the thing I was talking about, that you don’t interfere with what they do day to day.

Interesting stuff. When most are questioning this, Posen argues it is all fine.

Further, Posen in 1990s argued that Japan could have used fiscal stimulus. His paper is cited often by Keynesian guys to support their views.

Now he says those times were different. Now mon stimulus alone can help:

Before we conclude, let me just circle back to one point that you made initially. When you talked about the Japanese stimulus efforts, you mentioned that besides monetary stimulus, they are talking about fiscal stimulus and trying to get the private sector to spend more or invest more. Is that likely to produce any dramatic results?

Adam Posen: No. That is where I—as opposed to where I very strongly agree with the general thrust on monetary policy—I strongly disagree on fiscal policy. Some people who have been following this may remember in the late 1990’s, early 2000’s, I was pointing out that fiscal stimulus was a good idea in Japan in that context. But that’s 15 years ago now. And their current problems are not due to a generalized lack of demand. It’s due specifically to deflation and an over-valued exchange rate. So it makes sense to do a lot of monetary stimuli. But they have accumulated more debt through the years, and it is a different
situation and they have wasted a lot of the money they spent. And so, 15 years later, yes, they have, I think, run out of room. Not in the sense that literally tomorrow Japanese bond interest rates go through the roof, but that they’ve run out of room. It is no longer productive for them to be engaging in fiscal stimulus, at least beyond trying to rebuild the
places that were hit by the tsunami.

So, I think the monetary impetus is right, but I think that a fiscal stimulus right now for Japan—it’s always context specific when it works and when it doesn’t— I don’t think it’s productive.

Interesting thoughts..



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