Should the BOJ buy up Japan?

Robert Madsen had an editorial in the WSJ recently, and I want to comment on some of it. His article was titled, Playing Politics With Japan's Money Supply. Note the title already tells you something, that Mr. Madsen views the money supply as something that can be played with. He's exactly right though, fiat currency can be played with, and with disastrous results. Now let's look at the article:

The Japanese central bank has a long record of failure in its primary duty of maintaining price stability, which most economists define as an annual increase in the consumer price index of 1% to 2%. Since gaining its statutory independence from the Ministry of Finance in 1998, the BOJ has never attained that goal.

This is just a bizarre statement really. Does anyone at all believe that the Bank of Japan is actually capable of this? First of all the exchange rate is a huge factor in terms of the price of goods, especially for Japan. Now the exchange rate depends a lot on the policy of other central banks. If they have loose, irresponsible policies, the value of the yen will increase, will it not? This means that there will then be a general lowering of the consumer price index as foreign imported items become cheaper, right? And if that happens, the Bank of Japan is suppose to keep up? Anyway, obviously prices are are incredibly complicated, so the idea of the BOJ just being able to easily supply some random inflation figure is quite an amazing claim.

You know, actually, Japan's price index now is slightly below what it was in 1993. In the interim, it has gone up as much as 4% at times, before going back down. If we actually were to take price stability to mean -- gasp -- a stable price, Japan's price index has been pretty stable. I'm not saying that it should be, but as measured by the general index, it really has been.

The economy languished in deflation from 1999 until 2006, when the global economic bubble pushed up the cost of oil, metals and other imported goods.

The Bank of Japan did increase the monetary base during this time. In March 1999 the monetary base was 585,970 (100 million yen) and by January 2006 it was 1,141,316 (100 million yen). You can get the statistic here. In absolute terms that's nearly a doubling of the monetary base in seven years. But according to Mr. Madsen the BOJ did not inflate enough? I'm truly confused. I'll note that a big problem here was lending. Banks did not want to lend out money.

I'm not sure, but I take it that a lot of these banks were ready to go under. Instead of letting that happen the BOJ deposited with them high powered money (-- okay it was more complicated than that but just to keep things simple --) and that money just stayed on their balance sheets while they slowly cleaned up their bad debts. That is, they used the money only so they could keep their balance sheets looking good, while they slowly cleaned up their real balance sheets. I don't agree with what the BOJ did, but clearly there was massive quantitate easing. Does Mr. Madsen suggest they should have done more?

There are multiple reasons for the BOJ's poor performance. The main political factor is the central bank's determination to assert its autonomy by resisting pressure for easy money.

Hm. But there surly was easy money in the period Mr. Madsen was most concerned with, 1999 to 2006. How else can one explain the numbers?

The foremost economic factor is the inadequate demand that has bedeviled Japan for nearly 20 years, impairing the efficacy of such conventional monetary mechanisms as interest rates and reserve ratios. So when the banking system approached collapse a decade ago, the BOJ was compelled to pioneer what is now called "quantitative easing"—large-scale purchases of commercial paper, government and corporate bonds, equities and other securities—to improve credit conditions and safeguard the financial sector.

Well, I mean how much *stuff* do Japanese need, and exactly *what* stuff do they need? I'm sure there was a binge of buying stuff during the bubble economy, but did that help anyone? It used to be that when a foreign English teacher came to Japan he could pick up really good items for free on the days during the month when Japanese put large unburnable items out to be picked up for disposal. Japanese were buying so much new stuff like TVs and what have you, they'd actually throw out good stuff. It was nuts. Now people are being more conscientious. And that's bad?

Who gets to determine how much people should be consuming, and what they should be buying? What if the problem is that the market isn't providing the stuff that Japanese want to buy, and won't buy it so long as the government props up bad banks, which prop up bad companies, which make stuff no one really needs and doesn't necessarily want? In any event, for better or worse, BOJ did safeguard the financial sector, so what's Mr. Madsen's beef exactly? That there should have been inflation of 1% or 2% so that people would buy more stuff? Is he serious?

But the central bank did not go very far in this initial round of unconventional stimulus. Once the specter of a banking crisis had lifted in late 2002, the BOJ began tightening even though consumer prices were still decreasing.

Did they? Here's a graph comparing US policy with Japan (click it to make it bigger):

They didn't really abandon the policy till 2006, and I would guess by then the banks no longer needed their high powered money deposits, because a lot of them had cleaned up their balance sheets. I guess. In any event, again, what does Mr. Madsen want?

Bank spokesmen contended that the bank had done all it could to influence price levels and that the answer was for the fiscal authorities to stimulate demand more assertively. This created friction with the government, which felt that the BOJ could do more. The government was right. To paraphrase Milton Friedman, deflation is always and everywhere a monetary phenomenon. Putting the argument in the extreme, the BOJ could use its printing presses to issue an infinite supply of yen and then buy up the country's entire stock of commercial paper, government and corporate bonds, equities, real-estate investment trusts, actual real estate and—if it wanted—even commodities like rice and pork bellies. At some point the monetization of the economy would inevitably cause the inflation rate to rise into the target range.

There's simply no way the BOJ would ever be able to fine tune that, and what a disaster it would be for savers. Mr. Madsen wants inflation no matter what, so he thinks the BOJ should just keep buying stuff until they get it? How in the world can they actually know just how much to buy? And do we really need inflation?

Mr. Madsen goes on to say a recovery is immanent in the US and Great Britain. How about rampant inflation after a year or two along with continued unemployment? We'll see. I hope the BOJ doesn't take Mr. Madsen so serious.