The play’s not the thing
Monetary policy has become a form of drama, and Haruhiko Kuroda is the latest would-be star. The governor of the Bank of Japan has adopted a style especially suitable to these post-truth times. Call it theatre of the monetary absurd.
Central bankers today deliberate about official interest rates, money printing techniques and regulatory pressures, as they have done for decades. But policymakers’ speeches, promises and body language are now considered key tools in the seemingly endless play of economic stimulation – performed under the looming shadow of financial collapse.
The business is global, but the styles vary. The subtle act of Janet Yellen, the chair of the U.S. Federal Reserve, reflects a painful conflict. As a liberal labour economist, she has a strong but probably vain desire to use monetary policy to help create good jobs. That leads her to soft words and stimulatory policies. But as a veteran of the 2008 financial crisis, she is anxious to bring rates up enough to discourage financial excess. So she promises to be tougher – soon, but not today.
Mario Draghi deserves a prize for his ability to punctuate Italian commedia dell’arte with a hint of German angst. In 2012, the president of the European Central Bank used fine words to to sneak around wary but foolish politicians. They were overwhelmed by his promise to do “whatever it takes” to preserve the euro.
But Kuroda, whose personal manner is restrained, is the star of the moment. Last week he promised to buy, buy, buy government debt until the inflation rate reached – no, exceeded and stayed above – the targeted 2 percent. The yield on 10-year debt, currently slightly negative, would not be allowed to rise above zero until then. This deliberate commitment to monetary madness was worthy of the traditional and highly stylised Japanese Noh theatre.
For the cognoscenti, reading the rhetorical runes can be as fun as a night at the theatre. But as far as policy goes, there is a big problem. All these subtle words and extravagant commitments are unlikely to have much economic effect.
Throughout the developed world, inflation and GDP growth are held back by poorly understood forces. The list includes too much debt, economic fear and competition from low-wage producers. Stagnant or shrinking workforces are also a serious drag. One thing that all these factors have in common is their immunity to the standard practices – and words – of monetary policy-makers. Interest rates and the supply of money are almost irrelevant, and comments about future interest rates and money supply are irrelevance-squared.
Kuroda’s dilemma is especially tragic-comic. He almost certainly cannot prevail against Japan’s especially disinflationary demography. The country’s working-age population is shrinking by about 0.5 percent annually, while the number of lower-spending over-65s is increasing at close to a 3 percent rate. Indeed, in this environment there is a tragic hubris in negative interest rates. They are less likely to encourage young people’s spending and investing than to spur the old and the soon-to-be-old to save more.
Then again, Kuroda’s flourishes amount to a lively fencing match with no opponent. It is hard to see what aggressive monetary policy is supposed to achieve in an economy that is already fully advanced and fairly well functioning. The output per Japanese worker continues to advance steadily, the unemployment rate is low, the current account is pretty much in balance and prices have been stable for more than two decades.
It is easy enough to mock the economic confusion which pervades the central bankers’ verbal dramas. But there is something alarming about these supposedly powerful men and women relying on what professionals soberly call forward guidance. The problem is not merely the declining credibility of promises which are not kept, but absurdly high expectations. Today’s central banks cannot cancel debts, improve workers’ skills or cut job-discouraging taxes and rules. Indeed, as eight years of ultra-low interest rates have made clear, they cannot even do much to pump up spending or investment.
The Bank of England’s Mark Carney has set a realistic precedent. Although he offered great drama in his bleary-eyed appearance early in the morning after the British vote to leave the European Union in June, he was clear that the central bank could do relatively little to mitigate the long-term damage this separation would do the national economy.
Other central bankers would do well to try out similar lines. Performers who exaggerate their powers often end up just looking ridiculous.