04 November 2012

Business Insider: Bank of Japan takes surprise step that could change future of central banks

The BoJ governor, the Minister of Finance and the Minister of State for Economic and Fiscal Policy jointly issued a press release on the BoJ website - "Measures Aimed at Overcoming Deflation". The executive branch politicians in Japan have, for the first time ever, infiltrated the mother ship.

Over the past few weeks, there's been a growing buzz about central banks playing a greater role in explicitly serving as funders of government. The idea that people (journalists and Wall Streeters, mostly) have been talking about is the notion that central banks could buy government debt (as they do in quantitative easing) but then just rip up those bonds, and cancel the debt, with few consequences, except perhaps some inflation (which central banks want, anyway).

This kind of blatant monetisation seems unlikely but the idea of central banks working more closely with their government to stimulate the economy may be on the road to happening. The Bank of Japan took a shocking step in this direction, according to David Zervos of Jefferies, who notes that the latest easing announcement was a joint production between the Bank of Japan and the Ministry of Finance.

The BoJ governor, the Minister of Finance and the Minister of State for Economic and Fiscal Policy jointly issued a press release on the BoJ website entitled - "Measures Aimed at Overcoming Deflation". The executive branch politicians in Japan have, for the first time ever, infiltrated the mother ship. BoJ independence is now under explicit political attack.

The question that inevitably arises in the wake of today’s asset-purchase top-up therefore is to what extent government pressure, and the presence of economy minister Maehara, influenced the decision? In view of the unwavering emphasis that Shirakawa has placed upon reform (as recently as last week in fact) and upon the impotence of monetary easing in its absence, it is very difficult to believe that politics was not a factor. Yet if keeping the peace was an element in today’s decision, then Maehara and co may be forgiven for looking to leverage this ‘susceptibility’ between here and the as yet undeclared date for the next general election. Indeed, note that when Seiji Maehara emerged from today’s meeting, he said: “We have confirmed that we will make the utmost efforts to achieve the common goal with a strong sense of responsibility". ‘Will’, ‘common goal’, ‘strong sense of responsibility’? The BOJ’s next meeting on November 19th and its aftermath could well be very interesting.

So it's possible that this presages a change in central bank policy around the world, but it's worth noting the idea that it's pressure from the Ministry of Finance that's pushing the BoJ to act, whereas in the US, the current winds prevail in the opposite direction, towards less easing.

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