Posted by: Dirk | December 23, 2015

Bank of Japan engages in industrial policy

The Neue Zürcher Zeitung (NZZ, from Switzerland, German-speaking) reports:

Gezielt will sie Firmen fördern, die in Maschinen oder Mitarbeiter investieren. Das ist reine Industriepolitik. Die Bank unterstützt damit die Regierung, die will, dass die Unternehmen mehr für die Erholung der japanischen Wirtschaft tun. Damit beweist die japanische Notenbank aber einmal mehr, dass es um ihre Unabhängigkeit schlecht bestellt ist.

So, the Bank of Japan  – the country’s central bank – will promote firms that invest in machines or human capital. This, according to the NZZ, is pure industrial policy. The bank would support government, which wants companies to do more for the recovery of the Japanese economy. Once more the central bank would prove that it is not properly independent.

Personally I would prefer the Japanese government to cut taxes and increase spending, which is the more conventional choice to stimulate your economy. However, I don’t know much about Japanese politics – the idea to raise taxes in the beginning of a recovery struck me as ideologically motivated – so maybe this is a viable second best solution to a lack of demand?

Central bank independence can be positive, but if the result is that a central bank declines to support the government’s policies to increase economic growth then there must be a trade-off. Industrial policy by a central bank is not a first. Actually, the Bank of Japan has engaged in something called window guidance in the second half of the 20th century (source):

Throughout the postwar period of rapid economic growth in Japan, the Bank of Japan (BOJ) has guided lending by financial institutions. This “window guidance,” as it is called, sometimes takes the form of restrictions on lending by major financial institutions, particularly during periods of tight monetary policy (Suzuki 1987).

Given that many countries in the periphery have lost some of their industrial base, the Japanese post-war experience and the trouble with bubbles might hold a lesson or two for these countries?


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