Bernanke Sees BOJ Options Limited for Any Boost in Stimulus

  • Coordination between BOJ and government best option if needed
  • Transmission channels of policy also approching their limits

The Bank of Japan’s options to increase its stimulus are increasingly limited and closer coordination with the government may be the best approach if more is needed to reach its inflation target, according to former Federal Reserve Chairman Ben Bernanke.

"If all goes well, the BOJ’s current policy framework may yet be sufficient to achieve the inflation objective," Bernanke said in a speech at the BOJ in Tokyo on Wednesday. “If not, there are relatively few options available.”

Even after more than four years of increasing stimulus under Governor Haruhiko Kuroda, inflation in Japan is far from the 2 percent goal, and almost all private economists doubt the central bank’s forecast for reaching the target in around the fiscal year that ends in March 2019. Bernanke repeated that the BOJ should continue trying to reach 2 percent, because higher inflation and interest rates will help economic stability and allow the bank to respond to any future recessions.

“The most promising possibility -- should we get to that point -- is more explicit coordination of monetary and fiscal policies,” he said. For Bernanke, that means more spending and tax cuts from the government and the BOJ acting to offset the impact of that on the ratio of national debt to gross domestic product.

Increasing Impact

“Monetary policy that is aimed at limiting the impact of fiscal expansion on the government’s debt could both make fiscal policy makers more willing to act and increase the impact of their actions,” said Bernanke, who led the Fed from 2006 to 2014 and has written extensively on Japan’s economy and monetary policy.

The proposal is similar to that of Nobel laureate Christopher Sims, which doesn’t have much support at the BOJ. Kuroda has said that while interesting, the theory is opposed by many academics and there’s no need to take such a step in Japan. Deputy Governor Kikuo Iwata said he opposed the theory, saying it needed more proof.

Sims called for fiscal policy to be "aimed at increasing the inflation rate, with monetary and fiscal policy coordinated on this objective."

Bernanke said Sims’ argument "is that monetary policy matters in how it affects the fiscal reaction. And so, exactly what I’m saying here, monetary policy should make it possible for fiscal policy to lead by promising to support fiscal policy."

Independence Question

Bernanke said the independence of a central bank will only be at a risk if it isn’t making efforts to meet its mandate. He shrugged off questions about potential risks for causing hyper-inflation.

"It’s like saying I’m seriously underweight but I can’t eat anything cause I might get fat in the future," he said, responding to a question about what the BOJ should do to contain the risk of hyper-inflation once the price target was reached. "So far, the trouble has been getting inflation up to target, it has not been a problem of arresting inflation above target. We understand perfectly well how to manage that."

“There’s no way to think about Japan’s situation without thinking hard about how the monetary and fiscal aspects interact," Bernanke said. "The key thing is the central bank says we’re going to work together: You’re going to do a fiscal program, we’re going to overshoot our inflation target. Those two things are complementary. That is what gives you extra force that the central bank by itself can’t achieve."

He said that while the BOJ may be reluctant to take such a step, there could be a time when it has little choice.

"In the possible future state that I am contemplating, however, there would be no real alternative other than to abandon the fight to raise inflation and, perhaps, even to accept a new bout of deflation,” he said. “After such a long and valiant effort to end deflation and raise interest rates from their effective lower bound, that would be a most disappointing outcome.”

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