Each week, Symposium Magazine invites an author to guest-blog. This week’s featured piece is Why Central Bank Transparency May Be Overrated by Brigitte Granville.
As readers of my earlier posts will have spotted, much of my research over the years has revolved around the problem of how to reduce excessively high inflation. The fascination of Japan lies in its presenting a deep and intractable problem of price instability in the other direction – that is, deflation.
This week marks the first anniversary of the premiership of Shinzo Abe, prompting renewed debate on Japan’s prospects of overcoming deflation and returning to the sustained growth that has eluded the country since the bursting of its debt bubble in 1990. The good news for Abe is that Japan’s core CPI, after years in negative territory, made it up zero in September; the bad news is that despite the resulting rise in inflationary expectations, there is no sign of the necessary wage inflation. Meanwhile, the outlook for growth-oriented structural reform is cloudy as the usual vested interests resist moves to open up markets and improve competition. And there is no obvious answer to the conundrum of how to combine the fiscal stimulus required to support the present drive for an economic turnaround with the longer-term task of radical reduction in Japan’s public debt mountain.
Some optimism and also guidance about future trends may be derived from a 2011 study by Masahiko Shibamoto and Masato Shizume of Japan’s rapid recovery from the Great Depression, thanks to the so-called Takahashi reforms of the 1930s. Takahashi Korekiyo – Japan’s finance minister at that time – relied on a combination of fiscal, exchange rate and monetary policies, with the primary role played by exchange rate devaluation and a deep shift in inflation expectations. The yen depreciation after Japan’s departure from the gold standard in December 1931 was preceded by an upward swing of inﬂation expectations. The second upward swing in actual inﬂation was induced by the real eﬀect of currency depreciation.
Likewise, today, the 20 percent depreciation of the yen since Abe became prime minister a year ago – driven by a massive expansion in the Bank of Japan’s balance sheet – has been the key driver of the country’s improved growth performance, with real GDP expanding by 4 percent in the first half of this year. With other planks of Abenomics looking more fragile, a safe assumption must be that yen depreciation has much further to go.