Less than three weeks before a scheduled policy meeting of the Japanese central bank, Bank of Japan (BOJ) Governor Haruhiko Kuroda on Monday met with former US Federal Reserve chairman Ben Bernanke over lunch.
The BOJ issued no statement on the substance of the talks, which come as the central bank confronts a fresh strengthening in the yen this year that risks undermining inflation and weakening the appetite for investment and wage increases.
Japanese Prime Minister Shinzo Abe was to meet with Bernanke yesterday afternoon, Abe’s office said.
For Bernanke, offering views on Japan’s challenges and policy options would be nothing new. In 2003, he delivered a famous speech calling for greater cooperation between monetary and fiscal policymakers to defeat deflation and spur the economy.
In the room during Bernanke’s meetings with Japanese officials 13 years ago in Tokyo: Abe and Kuroda, who a decade hence unleashed an unprecedented stimulus to revive Japan. Now, that project is increasingly at risk, with inflation moving away from the BOJ’s target and GDP growth far from Abe’s goals.
Bernanke’s 2003 visit — when he was a Fed board member — and his message at the time is still discussed by BOJ officials.
Japan has a tradition of seeking the advice of overseas experts, something that has been taken to a new level under Abe, who consulted with Nobel laureates Paul Krugman and Joseph Stiglitz prior to his decision last month to delay a sales tax hike.
Unlike Bernanke’s visit this week, the meetings with Krugman and Stiglitz were well-publicized.
This time, the former Fed chair, whose roles now include that of a fellow-in-residence at the Brookings Institution in Washington, comes at a tough moment for the BOJ. While Kuroda’s initial 2013 stimulus succeeded in sending down the yen — boosting exporters’ profits and inflation — his most recent strategy has faced popular disapproval.
In a surprise move in January, the BOJ unveiled a negative interest rate policy that commercial banks have criticized for hurting their profits and damaging confidence.
Meanwhile, bond market participants and some former BOJ officials have criticized the core of Kuroda’s program — massive purchases of government debt — for damaging the function of the bond market.
There has been no sign yet from Kuroda and his colleagues that he is looking for a new means of stimulating the economy. On the fiscal front, Abe is preparing a spending package to be completed later this year, with no details on the size or the funding.
Bernanke in April published on his Brookings blog that, while there were many challenges behind such a strategy, a “monetary financed fiscal program” should not be ruled out in the case of an emergency in the US.
“Under certain extreme circumstances — sharply deficient aggregate demand, exhausted monetary policy and unwillingness of the legislature to use debt-financed fiscal policies — such programs may be the best available alternative. It would be premature to rule them out,” Bernanke wrote.
Tokai Tokyo Research Center chief economist Hiroaki Muto said Bernanke’s visit to Tokyo would spur speculation over further monetary easing by the BOJ.
“The BOJ probably won’t be able to do nothing and stand pat at its July meeting,” Muto said. “It may have little choice, but to take additional steps.”
In Muto’s view, these steps could include a deeper cut to the negative interest rate or increased purchases of exchange-traded funds.
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