Attack the Future to Change the Present!

So the goal is set for Japan’s government and its intermediary the Bank of Japan to increase the demand for money and lower its populations propensity to save in spite of the near zero nominal interest rate. To achieve this target it they must influence future expected prices, by changes in either fiscal or monetary policy.

There are many ways in which the Bank of Japan can achieve this in theory, unfortunately they are mostly still only theory as to implement most methods would require unfathomable quantities; often multiples of GDP for monetary policies in repeated instalments and politically unpopular fiscal policies. It is fitting that to break free of a situation once regarded as possible freak occurrence at an implausible boundary condition of economic theory, requires a solution as seemingly implausible and unbounded.

In a paper in 2000, aptly named “Japanese Monetary Policy: A Case of Self-Induced Paralysis” the irrepressible Ben Bernanke outlines some of the plausible “implausible” options open to the Bank of Japan in the effort to escape the liquidity trap that include;

*An extended period of 0% nominal interest rates, with inflation targeting.

*Substantial unilateral depreciation of the Yen leading to price-import inflation.

*The “helicopter drop” approach to quantitative easing, which is essentially to keep printing money until the price level rises, or if it fails to raise the price level, then the real wealth of the population will grow without bound, and at some point the public must transfer cash to goods increasing demand.

*Unconventional Open Market Operations; the Bank of Japan should go beyond purchasing just government and corporate bonds, by purchasing non-performing bank loans at face value this would effectively amount to a fiscal policy of gifts to the private sector to stimulate aggregate demand. Or invest heavily in foreign assets and testing the nerve of the market, either inflation will materialise or the Bank of Japan will become the richest institution in the world as the price of assets it is acquiring will increase without bound.

Many of the ideas outlined by Bernanke where originally conceived or hinted upon by Paul Krugman in 1999, but Bernanke is accredited with presenting the Bank of Japan with the all-important required ingredient of “Rooseveltian Resolve”. Which refers to the former president of the U.S; Franklin D. Roosevelt elected during the “Great Depression” in the 1930s.