August 24, 2019, 10:24


Bank of Japan’s Kuroda Criticises Modern Monetary Theory, Vows Steady Policy

Bank of Japan’s Kuroda Criticises Modern Monetary Theory, Vows Steady Policy

Japan’s top central banker has rejected calls for higher government spending, suggesting that the Bank of Japan (BOJ) is still capable of tackling all the emerging risks which may affect the nation’s GDP growth and employment.

Kristian Rouz – Haruhiko Kuroda, Governor of the Bank of Japan (BOJ), has stated that he disagrees with a set of proposed central bank policies known together as ‘modern monetary theory’ (MMT).

He says that BOJ policy will remain steady going forward, with unprecedented negative interest rates remaining in place, but his remarks may be interpreted as a warning against excessive loosening on the fiscal side.

During a central banking conference in New York Friday, Kuroda dismissed the MMT, which calls for unlimited budget spending as the main driver of economic growth, employment, and living standards. He didn’t explain his statement in more detail, but the governor’s previous remarks suggest he may favour a combination of loose monetary conditions and tighter fiscal policies.

​Kuroda’s remarks come amid speculation as to whether the cabinet of Prime Minister Shinzo Abe would implement additional fiscal stimulus to boost GDP growth and inflation over the next few months.

PM Abe intends to hike Japan’s sales tax to 10 percent this year, up from the current 8 percent, which is considered to be an effort to tighten the nation’s fiscal environment, and improve Japan’s budget performance.

“Even though we’re going into the election calling for a tax increase, the LDP (Abe’s ruling Liberal-Democratic Party) is in pretty good shape,” LDP Senator Shigeharu Aoyama says.

Abe’s plan falls in line with the latest remarks by Kuroda, despite some economists saying the BOJ stimulus, combined with tax cuts, could help Abe solve the problem of faltering GDP growth and tepid inflation.

​Supporters of the MMT argue for the state having full control over the national currency and the labour market. They suggest taht existing fiscal policies restrict the amount of financial resources available in the country, and say the national government could increase spending by as much as needed to ensure ‘full employment’.

​This, they believe, would boost the disposable incomes of households, and support consumer demand, resulting in quicker GDP growth. Regarding the mounting burden of national debt which would result from such policies, MMT supporters argue that the risks to sustainability could be reduced by introducing steep tax hikes and introducing additional government bonds.

The latter would, however, add to the national debt, and critics say it could impair the nations’ sovereign credit ratings in the longer-term.

Meanwhile, Japan already has its debt-to-GDP ratio standing at 253 percent as of 2017, the highest such ratio in the world; some say the island nation’s overall debt could be closer to 300 percent of GDP. This may reduce the government’s ability to respond to future economic shocks. Kuroda appears to agree that more and more borrowing is inadvisable.

“We’re seeing some weakness in exports and output, but there’s no change to the view Japan’s economy is growing moderately,” Kuroda said at a G7 finance ministers’ meeting earlier this week.

Even Kuroda’s critics appear to agree with him on the MMT.

​The BOJ Governor also appears to believe the central bank should play the leading role is supporting GDP growth and job creation, while the government should focus on maintaining the integrity of public finances.

“We will swiftly consider additional monetary easing steps if the economy loses momentum for hitting our inflation target,” Kuroda said.

Meanwhile, Abe could hike the sales tax it the coming weeks. He says the move will not require additional changes to VAT outlook for the next 10 years.

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