Where’s Independence?

Frustrated with long deflation, the government of Japan made its attitude clear toward intervention in monetary policy. Following the joint statement between the Bank of Japan and the government to introduce 2% inflation target, the government determined that it would verify the result of BOJ’s policy every three months. The leadership of monetary policy shifted from BOJ to the Cabinet. Then, where is the independence of the central bank?

BOJ has been reluctant to set 2% target. Under the pressure of politics, the bank announced last year that it would consider 1% as a data for decision of changing current zero-interest policy. It was its concern that once the bank set an inflation target, price might get uncontrollably high. From the political side, its policy was looked like ignoring slump of Japanese economy.

Prime Minister Shinzo Abe has been positive for setting 2% goal. He launched the Consultative Conference for Economy and Finance with mandate of the Governor of BOJ to attend. The conference will be a place where political leaders constantly put pressure on the bank. Although there are a number of countries to set price target, most set it for containing price hike. Setting target for escaping from deflation is rare case. “It is a dramatic effort in human history to get rid of deflation,” emphasized Abe.

In 1980s, bubble economy overheated when the government denied BOJ’s intention of raising interest. 

The amendment of the Bank of Japan Law in 1998 was to assure the bank’s independence from political intervention. Abe also said that BOJ needed to print bills making its rotary press work hard. It is close to a typical pattern that a central bank loses its credibility and the value of money is broken down.

The response of market is half positive and half negative. Some regard BOJ’s policy change as a firm sign of monetary easing. Others consider 2% target as meaningless and see no vision of increasing salary and reducing jobless rate. Skeptical about future vision, the foreign exchange market is hovering around ¥90 against one USD.

This fuzzy attitude is based on the notion that Abe only taking care of Japanese economy through April to June. If the economy marks 2 to 3% growth in this term, he will show “go sign” for raising consumption tax rate. Moreover, Abe puts the highest priority on taking simple majority in the election of the House of Councillors in July. It is more important goal for him than rebuilding Japanese economy. Market knows that well.

“The joint statement considers BOJ’s independence,” told the governor, Masaaki Shirakawa. However, if the bank was seen only as a printing machine for a political goal, credibility of JPY will be eclipsed.