NGDP targeting for Japan?

Here’s The Economist:

Mr Shirakawa’s decision [to resign], which caught even his BoJ colleagues by surprise, enables Mr Abe to appoint a new governor on the same day as two deputy governors. BoJ-watchers say there are three names prominently in the frame to replace him, all of whom share Mr Abe’s belief in bold monetary easing. They are Toshiro Mutoh and Kazumasa Iwata, both BoJ deputy governors from 2003 to 2008; and Haruhiko Kuroda, who currently heads the Asian Development Bank and, like Mr Mutoh, is a finance-ministry veteran.

Mr Iwata, 66, is widely considered the most dovish of the three. The head of the Japan Centre for Economic Research (which eschews interviews with journalists unaffiliated to the Nikkei, Japan’s main business paper), he supports big purchases of Japanese and foreign bonds to cheapen the yen and bolster the economy. Such ideas have been floated by Mr Abe.

Mr Kuroda, 68, fulfils different criteria set by the Abe administration: he is experienced at running an international financial institution, speaks good English and is used to globe-trotting. Masaaki Kanno of J.P. Morgan says he sits between Mr Iwata and Mr Mutoh in terms of dovishness.

According to a recent poll in the Nikkei, Mr Mutoh, 69, is the favourite among Japanese market participants (though an earlier nomination was blocked by a hostile upper house of parliament in 2008, when Mr Shirakawa got the job). In an interview with The Economist on February 5th, he called for “out-of-the-box” thinking at the top of an institution that he considers too cautious. He mentioned targeting nominal GDP growth, as well as inflation, in order to minimise the risk of stagflation. But he was dismissive of suggestions that the BoJ directly underwrite government bonds, and was opposed to the buying of foreign bonds to cheapen the yen artificially.

Naturally I favor the least dovish of the three.



16 Responses to “NGDP targeting for Japan?”

  1. Gravatar of Tom Hannaford Tom Hannaford
    23. February 2013 at 12:27

    To what extent might some of the Abe government’s other priorities (I’m not all that clued in to the specifics, but if IIRC he has been advocating a large amount of fiscal stimulus and some fairly protectionist rhetoric as well) offset the good done by even the expectation of consistent easing to get Japan out of its monetary malaise? I guess I’m hoping any Japan experts who are perusing the board may be able to help me out here…

  2. Gravatar of ssumner ssumner
    23. February 2013 at 13:36

    Tom, Good question. In my view the fiscal stimulus would be negative for Japan in the long run. So would protectionism, although I haven’t heard much about Abe’s plans in that area.

  3. Gravatar of dtoh dtoh
    23. February 2013 at 13:50

    Quick Ones

  4. Gravatar of dtoh dtoh
    23. February 2013 at 13:55

    Quick Ones..

    1. Scott, I think you want the most dovish candidate.

    2. The fiscal stimulus is being done as a concession to Aso who is being advised by Richard Koo (a proponent of the balance sheet recession theory).

    3. Abe is pushing the TPP (Trans-Pacific Partnership) which will significantly lower trade barriers but there is a lot of resistance from the farm lobby (traditionally a very important constituent of the LDP).

    4. I think Abe ought to pick Scott to head the BoJ.

  5. Gravatar of Tom Hannaford Tom Hannaford
    23. February 2013 at 14:14

    It seems the protectionist talk I was reading was coming from the party rather than Abe himself; thanks for the info!

  6. Gravatar of Suvy Suvy
    23. February 2013 at 15:30

    If the Japanese takes up the inflationary route, they need to be very, very careful. If their interest rates shift at all, they’re finished. They spend 50% of their revenues on debt service alone and that’s at 0% interest rates(their 10 yr is at .75%); 25% of that goes to interest. If their interest rates shift 100 basis points, they basically blow up. That’s what happens when your debt/revenue ratio is at 25.

    When you have a debt/revenue ratio of 25, a nonlinearity develops between your revenues and debt service costs with respect to inflation and rises in the interest rate. If a 4% rise in inflation shifts your bond yields by 1%, you’re finished. Japan has reached that threshold. I don’t think that printing money can save Japan; nothing can. I think you’re going to see a bond crisis with very high levels of inflation and possibly even a default of the Japanese government. When you have a debt/GDP ratio of 240%+, when you spend twice what you make (and have been doing so for a long, long time), when you spend half of your income on debt service, when you have an aging population where 65% of your revenues go to social security, and when your current account surplus turns into a deficit because your export led growth starts to falter when everyone in the world runs a ZIRP; you will blow up. There is no other option or alternative.

  7. Gravatar of TallDave TallDave
    23. February 2013 at 17:39

    It’s interesting that Mutoh mentions NGDPLT but opposes the currency intervention Iwata cites.

  8. Gravatar of Joe1 Joe1
    23. February 2013 at 23:03


    “least dovish”?

  9. Gravatar of I don’t care who becomes BoJ governor – I want better monetary policy rules | The Market Monetarist I don’t care who becomes BoJ governor – I want better monetary policy rules | The Market Monetarist
    23. February 2013 at 23:20

    [...] Sumner has a blog post who might become the next governor of Bank of Japan. Scott ends his post with the following [...]

  10. Gravatar of Rien Huizer Rien Huizer
    24. February 2013 at 02:57

    It would be very Japanese to pick the one publicly most at odds with the PM. And NDGP targeting would lead to a weaker yen, whatever instuments wone would use..

  11. Gravatar of Tim Condon Tim Condon
    24. February 2013 at 04:47

    The BoJ needs a new monetary rule. The global financial crisis revealed the zero CPI inflation rule delayed the recovery from large spending shocks. Real GDP still isn’t back to its pre-GFC level and growth seems likely to have slowed. The BoJ could do worse than mimic Taiwan’s central bank, which follows a Friedman rule and recovered rapidly from the GFC. Mr. Mutoh seems a reasonable compromise for relocating the BoJ to Taipei.

  12. Gravatar of marcus nunes marcus nunes
    24. February 2013 at 06:19

    Will there be ‘mañana’ in Japan. In the US, it seems ‘mañana’ never comes!

  13. Gravatar of ssumner ssumner
    24. February 2013 at 06:34

    dtoh, 1. No, the least dovish. The one who prefers NGDP targeting to exchange rate targeting. The one who doesn’t want the centrtal bank underwriting government bonds. Of cours ethat’s all based on the article–if I knew more I might have different preferences.

    4. I’ll need to learn Japanese first.

    Suvy, I agree that easier money can’t save Japan, but it can help.

    Joe1, I mean least dovish. I’m no dove—I’m a guy who favors NGDPLT.

  14. Gravatar of dtoh dtoh
    24. February 2013 at 08:32

    None of the candidates favor targeting fx. None of the candidates favor targeting NGDP. They all are more in less of inflation targeting. The more dovish favor higher inflation targets.

    Does it matter if BoJ buys bonds in the primary or the secondary market?

  15. Gravatar of I don’t care who becomes BoJ governor – I want better monetary policy rules | Fifth Estate I don’t care who becomes BoJ governor – I want better monetary policy rules | Fifth Estate
    24. February 2013 at 08:44

    [...] Sumner has a blog post on who might become the next governor of Bank of Japan. Scott ends his post with the following [...]

  16. Gravatar of ssumner ssumner
    25. February 2013 at 09:15

    dtoh, I’ll take your word for it.

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