Shiozaki: The end of deflation in sight; History: Yeah, right

February 26, 2007
By Ken Worsley

Earlier today, at a regular press conference, Chief Cabinet Secretary Yasuhisa Shiozaki said, “end to deflation is in sight,” and “the economy has recovered.”

That’s funny - the Federal Reserve Bank of San Fransisco basically said the same as Shiozaki’s former statement on November 19, 2004, in a paper called “Easing Out of the Bank of Japan’s Monetary Easing Policy.” We’ve heard it from others as well: Tanigaki, Omi, Ota - the list could go on forever.

For history’s sake, though, it’s worth looking back at what the FRBSF had to say fifteen months ago, in the conclusion to its paper:

The monetary policy challenges raised by the beginning of the end of the Japanese deflation era are less difficult than those previously faced, but they are challenging nonetheless. Moving from an extremely accommodative monetary policy stance to one that is proper for more conventional circumstances at a time when expectations concerning positive inflation have yet to be firmly established raises the concern that an adverse shock may lead to a reversion back to deflationary expectations.

Because the BOJ is aware of the risks involved, it has taken great efforts to convey to the public a policy rule under which quantitative easing will not be ended until there is evidence that the Japanese economy has safely emerged from deflation. Nevertheless, the approaching end of quantitative easing demonstrates the tension between transparency and flexibility in monetary policy. As discussed above, some have criticized the BOJ’s stated policy, arguing that ambiguities could still arise under the stated rule that could be eliminated through the adoption of a formal policy rule. However, the BOJ has chosen a compromise solution, under which the criteria for moving away from the quantitative easing policy is relatively transparent, but retains some degree of flexibility to allow policymakers to respond to unforeseen circumstances.

More on Shiozaki, the yen, Henry Paulson and Vice Finance Minister Hideto Fukuii in a bit…

Filed Under Economics, Monetary Policy