Mr. Kuroda's vacation plans
This is from the Wall Street Journal blog Japan Real Time:
Bank of Japan Gov. Haruhiko Kuroda has set himself apart from his predecessors with his aggressive style of running the central bank, and it turns out his approach to preparing for summer vacation is a departure from the past too. In an unusual move for a Japanese central bank governor, Mr. Kuroda on Monday talked a little about his summer holiday plans. “To tell the truth, I’m planning to take time overseas for a summer holiday in mid-August,” Mr. Kuroda said in response to a question at an otherwise straightforward speech on monetary policy and the economy. While taking a week off during the summer isn’t unusual for a BOJ governor or other senior officials, talking about it in front of an audience of nearly 1,400 is unusual. Customarily, the BOJ keeps the governor’s holiday schedule secret, partly out of concern that announcing it could lead to unintended speculation in financial markets. Moreover, the BOJ governor’s absence during Japan’s traditional August holiday season suggests the central bank doesn’t expect any major issues to arise during that period. Mr. Kuroda did indeed appear relaxed as he talked about the effects of his monetary easing program, saying the economy is on a “steady path toward escaping deflation.”Good for him! This is how a central bank chief should be speaking, but it is in stark contrast to the "central banker as firefighter" attitude of many central bankers around the world. If you think of yourself as a firefighter who permanently have to stand ready to fly in a save the world when crisis erupts you will never have time for vacation. In fact you would think that if you tell anybody that you go on vacation then the world will fall apart because you are not there to fight the fire. However, it seems like Mr. Kuroda rightly do not see himself as a firefighter, but rather as a rule-following central banker. He has used his first time in office to spell out what Bank of Japan's nominal target (2% inflation) and what instrument (money base expansion) he will to achieve this target. As a result he could and should look relax and he should certainly take the luxury of a one-week vacation. In fact I would argue that he could easily book a month's vacation if he was confident that Japanese public and the markets understood the BoJ's target and its "reaction function". He wouldn't have to do much - given the announced monetary base expansion goes on and the inflation target is well-defined he should leave the rest of the "implementation" of monetary policy to the market. Imagine that his policy was 100% credible (it is not!) and a shock hits while he was on vacation. Lets for example imagine the the euro crisis flares up again and initially the demand for yen spikes. That would push down Japanese inflation expectations. However, under a 100% credible 2% inflation target if inflation expectations drops below the target investors will soon realize that that the BoJ will not allow inflation expectations to remain under 2% and as a result it will be profitable to put on trades that benefits from an easier monetary policy - higher stock prices, a weaker yen and a steeper yield curve. By doing this investors would automatically "implement" monetary easing and that will push inflation expectations back to 2% - whether or not Mr. Kuroda was on vacation or not. Lack of credibility shortens Mr. Kuroda's vacation Unfortunately Mr. Kuroda's inflation target is still not a 100% credible. In fact we are still very far from having a fully credible monetary policy target in Japan. Hence, market expectations of future Japanese inflation is still way below 2%. That is a pretty clear indication that investors are not fully convinced that Mr. Kuroda is on the way to beating deflation. Therfore, more work is needed to establish monetary policy credibility in Japan. I have previously argued (see here and here) that Mr. Kuroda should be even more explicit on referring to market inflation expectations than he has been. So maybe he should have added the following statement when he talked about his vacation plans:
“…So while inflation expectations have increased they are still far below our 2% inflation target on all relevant time horizons. We therefore stand ready if necessary to further step up the monthly increase in the money base. We will evaluate that need based on market expectations of future inflation. We will particularly focus on market pricing of 2year/2year and 5year/5year break-even inflation expectations. We want investors to understand that we will ensure that market pricing fully reflects our inflation target. That means 2% inflation expectations on all relevant time horizons. No less, no more. So when I am back from vacation in four weeks time I am sure the market will be pricing in 2% inflation. See you guys.”The world needs central bankers who implement credible nominal targets and therefore are able to take long vacations rather than firefighting central bankers who are never on vacation. The fact that Mr. Kuroda happily talks about his vacation plans indicate that we indeed has seen a shift in monetary policy in Japan from firefighting to a (more) rule-based monetary regime. PS Mr. Kuroda is saying he want to spend his vacation reading book. Good choice, but maybe he should also spend some time golfing. See here why. PPS At some point I will have to write a blog post why I think the Japanese are making a mistake when they are implementing an inflation target rather than an NGDP level target. ---- This blog post is also available in Japanese here.