BOJ Finds Inspiration in a 1930s Iconoclast

April 11 (Bloomberg) -- The Bank of Japan has decided to take bold action to reverse the nation’s economic decline.

The bank’s governor, Haruhiko Kuroda, announced a “new dimension in monetary easing,” vowing to double the purchases of government bonds and expand the monetary base. The BOJ also formally adopted a previously announced two-year target of 2 percent inflation. Quantitative easing will be the bank’s core business for the near future, a strategy that resembles the Federal Reserve’s response to the collapse of Lehman Brothers Holdings Inc.

The BOJ’s actions also mark a return, at least partly, to the unorthodox efforts of Japan’s finance minister in the early 1930s, Korekiyo Takahashi, who was praised by Fed Chairman Ben Bernanke for “brilliantly rescuing Japan from the Great Depression through reflationary policies.”

Takahashi has recently received renewed attention from economists, historians and policy makers. In Japan, the number of popular publications on him suggests a Takahashi following. A biography by Richard Smethurst, “From Foot Soldier to Finance Minister: Takahashi Korekiyo, Japan’s Keynes,” became an academic hit when it was published in Japanese in 2010.

Japanese Dress

The Takahashi revival is reinforced by his “Japanese-ness.” His amiable mien earned him the affectionate nickname of “Daruma,” a reference to the pot-bellied Buddhist deity and symbol of good luck. He was often photographed in traditional dress in a Japanese setting, in stark contrast with his Anglophile and unpopular predecessor, Inoue Junnosuke, whose Western gold-standard orthodoxy has been blamed for bringing the Great Depression to Japan. (Junnosuke was almost always photographed in Western business attire.)

Takahashi didn’t have an easy task. After the return to the gold standard at the prewar par, the country endured two years of deflation of more than 10 percent. The U.K. was the first country to abandon the gold standard altogether, but, as Barry Eichengreen points out in “Golden Fetters: The Gold Standard and the Great Depression, 1919-1939,” Japan may have been the first country to abandon the ethos of the gold standard. (For the U.K., abandoning gold was initially presented as an expedient in a time of crisis.)

Anticipating John Maynard Keynes’s later indictment of the gold standard as a barbarous relic, Takahashi’s policies radically defied the liquidationist orthodoxy of the time. After depreciating the yen, he also abolished the fiducial limit set for the issuance of BOJ notes. He then embarked on a program of fiscal expansion and further decreased the official discount rate. One of the central elements of his policies was the “undertaking system,” or “hikiuke,” which required the BOJ to purchase low-interest government bonds to make up for the difference between expenditure and income.

Nonetheless, it is difficult to disentangle the individual pieces of Takahashi’s brew of expansionary exchange-rate, monetary and fiscal policies, let alone to isolate the effects of each of these ingredients on the economy in the 1930s.

Some argue that the easy monetary policy kick-started the recovery. Others claim that fiscal stimulus was the key. Recently, economic historians Masahiko Shibamoto and Masato Shizume asserted that changes in the exchange rate were the biggest contributor to the economic recovery in Japan during the Great Depression; fiscal policy played a minor role, if any.

Changing Expectations

It would seem that today’s BOJ leaders have studied the research by Shibamoto and Shizume, because the bank’s new approach is squarely in the realm of long-term monetary policy, not fiscal or short-term policy. For example, the former asset-purchase program through open-market operations is terminated altogether. The focus is now entirely on expanding the monetary base and lowering the real interest rate, thus increasing the marginal cost of holding on to money. The aim of the program is “to drastically change the expectations of markets and economic entities.”

That the BOJ is serious about its intentions is also underlined by its decision to give up some autonomy. As in Takahashi’s day, fiscal and monetary authorities are now required to cooperate. This helps curb the deflation bias that is typical of independent central banks, and gives further credibility to the BOJ’s efforts to shift market participants’ expectations.

Even so, the 21st century isn’t the 1930s. Will a “commitment to irresponsibility” by the BOJ work in this context of increased financial complexity? The Japanese are often accused of waging currency wars, and foreign investors may be alarmed at the erosion of central-bank independence, which is perceived as leading to unimpeded deficit spending by the government.

We have been here before. The same arguments were advanced by the central bankers of the world in the 1930s, and they ultimately found themselves on the wrong side of history.

(Michael Schiltz is an associate professor at the Institute for Advanced Studies on Asia, University of Tokyo. He is the author of “The Money Doctors From Japan: Finance, Imperialism, and the Building of the Yen Bloc, 1895-1937.” The opinions expressed are his own.)

To contact the writer of this post: Michael Schiltz at

To contact the editor responsible for this post: Max Berley at

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