Yves here. Having worked in Japan, it is routine for the Western media to be out of the loop. So it is entirely plausible that there would be major policy moves under way in the island nation that had not been picked up by the press here.
By Philip Pilkington, a writer and journalist based in Dublin, Ireland. You can follow him on Twitter at @pilkingtonphil
Rumors abound that a deal is fomenting in Japan that might lead to the inflation targeting proposal that so many progressives champion on their blogs being put in place (clarification: even though inflation targeting was announced in February, there are doubts in Japan as to its seriousness. Japan is famous for “administrative guidance” in lieu of action).
About two weeks ago the Japanese denied the rumors, but they’re still cropping up among investors. I’ve heard similar accounts through my channels. The latest account is of a deal between Prime Minister Noda and the LDP (the main opposition party) to amend the Bank of Japan law in return for tax increases. The LPD has already drafted a law imposing inflation targeting on the BoJ in order to bring down the stratospheric yen. The LPD bill is said to be similar to a 2010 proposal by Your Party to establish an inflation goal and make the tenure of BoJ leadership dependent on sticking reasonably close to the target.
So, should the neoclassical-Keynesian/neo-monetarist commentariat be pleased? The tradeoff looks ugly. If the rumors prove to be true, the Japanese government is going to engage in fiscal austerity by raising taxes so that they may pass a law that states that any central banker who fails to achieve specific price-rises will lose his or her job. But reducing fiscal deficits in a weak and already deflation prone economy is even more deflationary; it’s hard to see how the BoJ can hit the target in the face of this headwind.
In truth, we have no idea if this policy is going to be effective in any way. And if it is effective we have no idea what sort of impact its going to have. I argued the other day that inflation targeting done in isolation may well lead to investors simply pouring into various so-called inflation hedges (gold, silver and other commodities) which, in an extreme case, may lead them to pull funds out of the government bond markets, drive up yields and thus lead to more excuses for the government to engage in austerity.
I don’t know if that will happen; it is merely one of many possibilities. But nor do the champions of inflation targeting like Paul Krugman and Matt Yglesias know what will happen if the policy is implemented — although they are confident because their ISLM model tells them that, theoretically, investment should rise together with a rise in inflation.
Well, we’ll see. After all, these are only rumors for now. Personally, I hope they’re not true. But if they are and the inflation-target skeptics are proved right, the champions might learn at least one lesson: throw a group of politicians what seems to be a simple and neat solution and they will pursue it with gusto — even at the expense of tried and tested, bread and butter policies that we know work.
So, to the neoclassical-Keynesian/neo-monetarist nexus: if you do throw around these sorts of ideas you’d better be certain that they will work. Because if you know anything about politics, you’d better realise what pushing them might lead to.