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The Bank of Japan Should Try a Carrot and a Stick: The Ticker

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By William Pesek

Japanese prime ministers don't tend to last very long . Prospects for the current one, Yoshihiko Noda, are looking grim as his approval rating grinds steadily downward.

This revolving-door dynamic explains why big economic policy shifts elude a nation badly in need of them. Japan's leaders spend so much time trying to keep their jobs that they have little time to actually do them. Also, it barely makes sense for peers at Group of Seven or Group of 20 meetings to learn the name of Japan’s latest finance minister. Why bother when he won’t be around very long?

The one constant when someone like Treasury Secretary Timothy Geithner wants to know the state of play in Tokyo is Masaaki Shirakawa. In an ever-changing lineup, the central bank governor is the one recognizable Japanese face when world policy makers devise plans for the global financial system. It's high time Shirakawa took that clout out for a spin and got radical.

Japan's fiscal policy trajectory is both clear and detrimental to growth over the next few years. Noda's full attention, until he too is shown the door, is devoted to doubling the consumption tax to 10 percent. That would further depress demand in coming years.

Here's what Shirakawa should do: Announce a return to the quantitative-easing experiment the Bank of Japan scrapped in 2006, but with a twist. It should come with a quid pro quo that the government act boldly to offset fiscal tightening with pro-growth steps, like massive deregulation and freer trade. Japan's $12 trillion public debt is more than double the size of its economy. Yet 10-year bond yields are under 1 percent -- a sign its problem isn't too much debt but too little growth.

Arguments that the BOJ should do more have long been oversimplified. The problem in Japan isn't the amount of yen, but uses for it. Unless banks ramp up lending and consumers and companies borrow, you don't get the multiplier effect that makes monetary policy so potent. The missing ingredient is confidence.

There's no end in sight for the deflation with which Japan has lived for over a decade. Who, in such an environment, would
expand domestic business plans or increase hiring? Word that the BOJ and the government are making a full-frontal assault against deflation might boost faith in the future and, in turn, growth.

It's often said that a central banker's role is to be the adult in the room when politicians dither. This is Shirakawa's moment to prove it.

(William Pesek is a Bloomberg View columnist.)


-0- Feb/06/2012 02:35 GMT

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