Cheap money has allowed banks to stay in business and to carry deadbeat companies. It's also provided support to the stock market. All told, the BOJ's easy-money policies have kept Japan's economy functioning all these years. As such, the central bank must bear some of the responsibility for Japan's 11-year slump.
Last week's surprise action drew similar complaints. It's not hard to understand why Hayami raised the target for the outstanding balance of deposits held at the central bank to Yn6 trillion from Yn5 trillion. For one thing, the move sapped some momentum from the BOJ's critics. For another, it turned the spotlight back on politicians who now have no one to blame but themselves for Japan's troubles.
Yet the risks inherent to the BOJ's action became clear in the days that followed. Far from being satisfied, government officials demanded even more from Hayami. With the economy set to deteriorate further, politicians argue, the BOJ shouldn't stop now. It's like the old adage: Give someone an inch and he or she will take a mile. The BOJ must now figure out how to quench politicians' thirst for more yen printing.
"The BOJ's latest move shows only that either it's willing to be more flexible or that it's easily bullied by politicians," says Ronald Bevacqua, senior economist at Commerz Securities Japan Ltd. "Either way, it opens the possibility of further easing." The upshot may be the loss of Hayami's "adult" status in the Japanese economy. While Tokyo has run away from reform for a decade, relying on public works spending to boost growth, the BOJ has been a voice of sobriety. Yes, it has provided help to the government -- too much, in fact -- but the BOJ also has worked to pressure politicians to fix the economy.
If the BOJ loses even more credibility with markets and its moral-high-ground position with Japan's government, its influence will wane. It's here where Hayami could take a page from the Volcker playbook. As Fed chairman, Volcker stood his ground against politicians, and the US is better off for his efforts.
Hayami has similar powers in Japan. Let's hope he uses them.
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