A Minute With The Minister In The Garden

On Monday at the Quatorze Juillet reception at the French Embassy I had a remarkable chance to speak one-on-one with a member of the Cabinet, Minister A. After an exchange of name cards and my brief self-introduction, I asked him a simple question: on a scale of 1-100, how would he rate the performance of the Abe Cabinet? His response was that it should receive a score above 90%, first for its ability to execute on its program, second for Mr. Abe's identifying from the outset Japan's need to exit from deflation. A prime minister's committing himself to ending inflation was a key achievement in and of itself, and Mr. Abe deserves credit for his identification of the problem. All indications are, the Minister continued, that the policies initiated by Mr. Abe's commitment to exiting deflation are taking effect.

What was striking in my conversation with the minister, aside from his extreme kindness in offering his opinion to lowly me, was his expression of the Abe government's commitment to the idea of exiting deflation as a goal without his ever mentioning the target rate.

I have been wondering about the government's actual stance on the goal of an exit from deflation. Richard Katz has mocked the idea of targeting an inflation rate, likening it to trying to cure a fever by putting ice on a thermometer (Link). Katz's love of his metaphor, and it is a good one, possibly leads him away from understanding the Abe's government's true goal. My sense of is that the stated figure of 2% annual CPI is more of a placemark -- a stand-in for a more iterative and elusive figure where the Japanese economy is on a self-sustaining growth path in spite of chronic deflationary pressures.

It may be that the Abe program, at least on the monetary side, is Shirakawa defeatism turned on its head and hidden under a faux Taylor rule cloak. Former Bank of Japan Governor Shirakawa Masaaki's feeling that there is no way to generate 2% inflation may be correct -- but the fact that the task of hitting 2% inflation is impossible is the reason why you try to do it. If you cannot -- cannot -- fight deflation through monetary means, where is the downside from trying anyway? Sure, you will have to come up with some cover story about the reasons why you are not hitting the target rate at the predicted time. However if GDP and wage growth have ignited in the meantime, who is really going to care?

Paul Krugman back in the mid-1990s was advocating that the Bank of Japan pull Japan out of its rut though a commitment to unlimited irresponsibility -- that the BOJ promise to do anything to pull the economy from out of the liquidity trap. Promising to be irresponsible with the nation's money is a tough sell in any democratic state, which is probably why the idea never caught on.

However, a government committing oneself to an impossible-to-achieve goal does not sound half as crazy as unlimited irresponsibility, even though it is effectively is the same thing.

So come next year on the 14th, if I meet the minister (he may not be a minister at that time, we shall see what happens in September) again under the tent in the garden, and the CPI inflation rate is not at 2%, and if he again grants me a minute of his time, I will ask him what score he would give, on a scale from 1-100, for the Abe administration's fight against deflation.