C&B Notes

Neverland Monetary Policy

Bank of Japan governor Haruhiko Kuroda appears to be taking some of his cues from Peter Pan.  We would rather all central bankers focus more on fundamentals and less on the power of pixie dust.

“I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it’,” he said.  “Yes, what we need is a positive attitude and conviction.  Indeed, each time central banks have been confronted with a wide range of problems, they have overcome the problems by conceiving new solutions.”

His remark is the latest in a series of unusual analogies he has used to illustrate the BoJ’s fight against deflation.  The BoJ governor has previously compared his policy to a rocket trying to escape the earth’s gravity and U.S. Federal Reserve chairman Paul Volcker’s fight against inflation in the 1980s. Mr. Kuroda’s point is the same every time: given Japan is starting from a very low level of interest rates, the only way it can stimulate the economy is by making the public believe inflation will rise, so confidence is crucial.  If the public anticipates higher inflation it will lower real interest rates — the expected return after adjusting for inflation — and stimulate the economy, making the expected rise in prices a self-fulfilling prophecy.