Keeping its word

At its previous meeting at the end of July, the Bank of Japan (BoJ) announced a comprehensive assessment of the developments in economic activity and prices under QQE and QQE with negative rates, in order to “achieve its 2% price stability target as soon as possible”. The title of the document posted on its website was even more explicit in announcing the measures that were bound to follow: “Enhancement of monetary easing”. This week, the BoJ kept its word by introducing a yield curve control, notably with a target on 10-year JGB yields, and above all, by committing to overshoot its 2% inflation target by increasing the monetary base by as much and as long as necessary. Some will call this irresponsible. Others will welcome this commitment to irresponsibility, which for so many years has been the battle cry of Paul Krugman, 2008 Nobel prize laureate in Economics. More precisely, Mr. Krugman called for “the credible promise to be irresponsible”. This raises the question of the credibility of the BoJ’s commitment. Former Fed Chair Ben Bernanke, who happened to have been called irresponsible in his time, raises questions of the pertinence of the BoJ’s decision to maintain its securities purchasing target unchanged, since it is redundant with the rate target. Unless, of course, one considers that by maintaining the former, it increases the credibility of the latter.

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