Whatever it takes.
Those are the three most important words a central banker can say. It's simple, really: People don't like to bet against someone who's willing and able to create infinite amounts of money to get what they want. That's why just uttering the phrase can sometimes be all that's needed. It's a kind of Jedi mind trick. But when that's not enough, a central bank has to put — or, more accurately, print — its money where its mouth is.
Which brings us to Japan. Its central bank, the aptly-named Bank of Japan (BOJ), stunned markets on Friday by announcing it will now buy ¥80 trillion, or $714 billion, of bonds a year with freshly-printed money, rather than the ¥50 trillion it had been before. It will also triple its purchases of stocks and real estate. So, in all, it's increasing its stimulus efforts by somewhere between ¥10 trillion and ¥20 trillion a year. That's actually doing whatever it takes to try to boost Japan's still-nascent recovery and still-low inflation rate.
Markets, at least, loved it. The Nikkei rocketed up 4.9 percent, and the yen fell 2 percent against the dollar, which is good news since a cheaper currency should help support prices and exports. But for all this financial exuberance, Japan's economy is still struggling to dig out of its deflationary hole. You have to print a lot of money to convince people that things are changing when there are twentysomethings who aren't old enough to remember what rising prices are like.
Japan's bubble, you see, burst in the early 1990s, but for the next 20 years the BOJ mostly acquiesced to low growth and even lower, negative actually, inflation. Instead of coming up with a plan to revive its economy, it just came up with excuses why it couldn't. Now, it's true that it finally ditched some of this fatalism and started printing money after its first lost decade. But the problem was it stopped as soon as things only looked half-bad. The BOJ lacked, as a then-Princeton professor named Ben Bernanke put it in 1999, the "Rooseveltian resolve" to keep experimenting until something worked.
The cost of all this caution, as you can see in the chart below from Brad DeLong, was enormous. It shows Japan's GDP per capita as a percentage of the U.S.'s throughout the postwar period. The short version of the story is that, by the late 1980s, it looked like Japan would not only catch up with the US, but actually pass it. (The old joke, as Paul Krugman reminds us, was that the Cold War was over, and Japan had won). Indeed, at its peak, the land beneath Tokyo's Imperial Palace was supposedly worth more than the entire state of California. But then its boom turned to bust, and the BOJ sat passively by while deflation and deleveraging decreased growth. The result was that Japan actually lost ground to the U.S. in the 1990s, and hasn't made up any of it since.
So instead of becoming as rich as the US, Japan, despite all its technological marvels, seems to have plateaued at a permanently poorer level.
But then came those three little words. It started in 2013, when new prime minister Shinzo Abe decided that two lost decades were enough, and it was time for the BOJ to get serious about getting prices rising and the economy moving again.
Let's back up for a minute. Why aren't falling prices a good thing? Well, anytime inflation is too low — practically-speaking, 1 percent or less — it makes it harder to pay back debts and means there isn't as much reason to spend or invest now rather than later. Put simply, it hurts growth.
That's why Abe appointed an outsider, Haruhiko Kuroda, who didn't buy the BOJ's excuses, to run the place instead. And he didn't disappoint. Kuroda promptly raised the BOJ's inflation target from 1 to 2 percent, started printing tens of trillion of yen to buy bonds with, and said he wouldn't stop until inflation got up to its new target. And if that wasn't enough, he said he'd do, yes, "whatever it takes" to end deflation.
Well, now we're finding out Kuroda meant what he said. See, Japan's economy and inflation rate have heated up the past year, but this progress has stalled out recently. That's because the government just passed a big sales tax hike, and lower oil prices, while good for the economy, have kept inflation expectations from rising anymore. So Kuroda is stepping on the gas even harder to make sure the economy gets to where it's supposed to go. And he's doing that over the objections of four of the BOJ's nine voting members. In other words, Kuroda's not going to accept failure, and he doesn't care what anyone else thinks.
"The most dangerous idea" in monetary policy, Berkeley professor Christina Romer has said, is that "monetary policy doesn't matter." The Federal Reserve made this mistake in the 1930s, when it said it was powerless to stop the vicious circle of default and deflation. It made the opposite mistake in the 1970s, when it said rising inflation was beyond its control. And it's the same one the BOJ has been making as its economy has languished for two decades now—well, at least until the last year. The lesson is that monetary policy has only failed when it hasn't been tried. And that's the best news for Japan. Even if all this stimulus isn't enough, the BOJ is determined to keep going until something does.
FDR would approve.