U.S. Treasury to BOJ: Do As We Say, Not As We Do

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For over two decades, economic policymakers in developed countries have been telling Japan to get its act together. The once-great nation that was going to eat the U.S.'s lunch pretty much fell off the global map after its real estate and stock market bubbles burst in 1989.

The problem, according to the diagnosticians, is chronic deflation, or falling prices. The cure? More money.

With a new president and central bank governor in place, Japan has finally decided to get serious. Earlier this year, Prime Minister Shinzo Abe announced a "monetary regime change" including a 2 percent inflation target. On April 4, following its regular meeting, the Bank of Japan made its "quantitative and qualitative monetary easing" official.

The BOJ will double the monetary base by purchasing about 7.5 trillion yen of Japanese government bonds per month. It plans to extend the average maturity of its portfolio from three years to seven years. And it will continue such actions until it achieves its inflation target.

In other words, the BOJ is doing exactly what the Federal Reserve is doing. And for this it gets a warning from the U.S. Treasury "to refrain from competitive devaluation and targeting its exchange rate for competitive purposes"?

The message came in the Treasury's semiannual report on international exchange rates, released on April 12. The U.S. encouraged Japan to adhere to the commitments made in conjunction with the other G-7 and G-20 countries "to remain oriented towards meeting respective domestic objectives using domestic instruments."

Deflation is a domestic issue, assuming no other country uses the yen as its currency. The treatment for deflation is an increase in the money supply. My late monetarist friend, Bob Laurent, used to say deflation isn't the worst problem a central bank can have.

For what it's worth, Japan's "deflation" doesn't look that bad, at least in the data. Over the last 20 years, for example, the consumer price index has averaged zero. That's about as close to price stability as it gets. In the last five years, the CPI has averaged -0.2 percent annually. Somehow I doubt the man on the street can perceive such an infinitesimal price decline.

Then again, I'm not the one diagnosing the problem or berating Japan for complacency. I find it puzzling that the U.S. can blame Japan for doing what it's been telling Japan to do and, at the same time, challenge its choice of medicine.

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