The Tell: This former Japanese central banker stood alone against QE — here’s what worries him now

Against that backdrop, Takahide Kiuchi, an executive economist at Nomura Research Institute, shared some thoughts with MarketWatch on Modern Monetary Theory, the risks around ultra-low interest rates, and the surge in global debt levels amid the coronavirus pandemic.

He also spoke of Shinzo Abe’s recent resignation as Japan’s Prime Minister, the nation’s longest-serving in history and a key architect of its economic reforms since the mid-2000s, including boosting the nation’s money supply, increasing government spending and attracting private capital.

Kiuchi was a member of the Bank of Japan’s policy board, it’s most important policymaking committee, for five years between 2012 to 2017. In his time, he was noted as the sole dissenter against the BOJ’s use of quantitative easing, or large-scale asset purchases, as well as negative interest rates. He also opposed its commitment to a 2% inflation target, a goal that continues to elude the central bank.

The interview has been edited for length and clarity.

The U.S. Federal Reserve recently switched to average inflation target. When you were at the BOJ, you appeared to be worried about having an inflation target that was too high. The U.S. has struggled to hit its own 2% target. Does that cause an issue of central bank credibility?

Takahide Kiuchi: I think that a 2% inflation goal for the Bank of Japan is too high, and I think it’s inappropriate. The trend rate of inflation seems to be less than 1% in Japan. And that trend rate could have fallen further after the coronavirus.

Generally speaking, it’s risky to seek a specific inflation goal for central banks, including the Federal Reserve. The change of guidance around the Fed’s inflation goal carries some risks. I believe in light of Japan’s example, aiming for a specific level of inflation rate could undermine the stability of the financial system and markets.  

A strict inflation target could create imbalances in financial markets through lower interest rates. Due to negative interest rates, bank profits, particularly for regional banks in Japan, have been undermined.

We’re seeing some countries combine monetary and fiscal policy to provide stimulus in a very aggressive way. Are there any dangers if policymakers take advantage of low interest rates to finance government spending?

Takahide Kiuchi: Debt monetization used to be unique to Japan and Europe. This kind of policy mix is going to be employed in many countries after the coronavirus. There is a big potential risk that it could undermine the confidence in fiscal and monetary policy. In some countries, this could lead to a fiscal or currency crisis, particularly in low income countries.

Japan is a bit different than the U.S. There is no serious risk of long-term yields going up in Japan. Even if the government increases spending and increases issuance of government bonds that doesn’t necessarily cause long-term yield, or a higher risk of default, because 90% of government bonds are held by Japanese people. They don’t expect a higher yield premium, so the government can issue a lot of government bonds without causing an increase in interest rates.

Proponents of modern monetary theory say the belief that countries that borrow in their own currency have more capacity to run fiscal deficits than once thought. They point to the experience of Japan as validation of MMT, especially when inflation isn’t a big problem. Do you think that’s true for the U.S?

Countries with a single currency and an independent central bank can avoid an increased risk of default even if they issued a lot of government bonds. In that sense, I do think the theory of MMT is correct.

But the risk of default is not the only side-effect of a deterioration of fiscal conditions. In Japan, the increased issuance of government bonds undermines the stability of the economy and productivity growth.

Both potential growth and productivity has continuously declined in the past several years. The deterioration of fiscal conditions also transfers costs to the next generation.

In the U.S., the policy of targeting yields for certain bond maturities, or yield-curve control, is being studied. But it’s also seen as a continuation of easy monetary policy. Based on Japan’s own history with the policy, do you see that being the case?

It’s not a scheme for easing monetary policy. For the BOJ, that was not the purpose. That’s something not correctly understood in the U.S.

One purpose was that the BOJ wanted to keep stability of the yield curve. The other purpose was the BOJ wanted to reduce the pace of purchase of government bonds.

If the BOJ had the intention to support the economy, it should have set the target yield below the market price. Instead, they set it at the market price. This shows the BOJ had no intention to stimulate the economy with yield curve control.

What does Abe’s resignation mean for economic policy?

Fiscal policy of the Abe administration is likely to be taken over by a new administration. I think the expansionary fiscal policy stance could be rather strengthened if [Yoshihide] Suga (chief cabinet secretary), who seems to be a front runner…will be a successor of Mr. Abe.

As for monetary policy, the stepping down of Mr. Abe may influence it in the longer term because BOJ Governor Kuroda was nominated by Mr. Abe and his influence on BOJ is not small.

Although the BOJ is likely to argue that its monetary policy is not influenced by a change of administration, it increases freedom of policy to some extent. I think it may make it easier for the BOJ to gradually normalize its use of extraordinary monetary policy over the [next] several years.