The Japanese economy is facing an unusual series of problems which have proved difficult for officials to address. Low birth rates and strict nationalization policies have resulted in an aging, shrinking population. Although Japan has the third largest Gross Domestic Product (GDP) in the world, it has had virtually no growth in the past two decades. Structural problems and, as we will examine in this article, overly cautious monetary policy have caused deflation in recent years.
Negative interest rates, the promise of 0% interest on a 10-year bond, and attempts at actively discrediting the Bank of Japan (BOJ) have all failed to raise inflation rates in Japan. Even in a world where developed countries are stuck in a state of secular stagnation due to sky-high corporate savings rates, Japan stands out. If one adheres to Ben Bernanke’s prescription that the mission of a central bank is to “strive for low and stable inflation,” and “promote stable growth in output and employment,” then it is the responsibility of the BOJ to fix the problem of zero growth and deflation.
According to Martin Wolf at Financial Times, corporations in Japan are saving over 20% of their capital. This makes up nearly 8% of Japanese GDP. When money is being held in banks instead of invested, money changes hands less frequently, effectively decreasing the money supply. Like with most things, the less money there is in circulation, the more it is worth. Wolf refers to this as a “savings glut.” Conservative corporate policy is currently causing deflation in Japan and hindering growth.
This negative externality created by the private sector should clearly be disincentivized. By creating seigniorage — profit created by issuing currency — the BOJ could effectively tax this stockpiling of yen. Printing more bank notes would increase the money supply and therefore decrease its value. This currency devaluation would create more incentives to invest rather than save, and, as an added benefit, would create much-needed growth in the manufacturing sector.
Issuing currency with nothing to back it may seem bold, but it has been tried before. In 2011, the European debt crisis caused the euro to crash. Believing that it was a strong, safe currency, many investors began trading their euros for Swiss francs. Switzerland’s currency began to gain value very rapidly. In order to prevent the massive appreciation of the franc, the Swiss central bank committed to printing as many francs, and purchasing as many euros, as needed to keep the franc to euro ratio above 1.20. As shown below, the franc first depreciated due to the announcement itself, but the policy was first put to the test in January 2012.
Data from: Global Financial Data
Capping the franc turned out to be a success. The creation of seigniorage stopped the growth in deflation and even managed to create some small inflation. The policy would not be put to the test again until the franc began to appreciate again in late 2014. This time, however, the Swiss central bank did not remain as astute. Instead of allowing the policy to take effect, they lifted the cap, and as a result, deflation skyrocketed.
Data From: http://www.inflation.eu
If the BOJ adopted a similar policy, it could jump start its countries slow economy and move towards its goal of consistent growth. Savings rates would decrease, spurring more investment. The yen would depreciate, spurring growth in the manufacturing sector. Finally, this printed money could be used to pay for additional social programs for the aging population, or to pay back some of the massive debt the country has acquired.