Ben Bernanke is far too polite to tell the Bank of Japan “I told you so.” But according to the BusinessWeek folks he could. Way back in 1999, when he was just another academic economist in civvies, Bernanke wrote a paper called “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” In it, the Princeton economist who later became the U.S. Federal Reserve chairman argued that Japan’s central bank could, and should, escape from its deflationary “liquidity trap” by deliberately causing inflation. (He credited another Princeton economist, Paul Krugman, for having the same idea earlier.) Bernanke wrote:
“In particular, a target in the 3-4% range for inflation, to be maintained for a number of years, would confirm not only that the BOJ is intent on moving safely away from a deflationary regime, but also that it intends to make up some of the ‘price-level gap’ created by eight years of zero or negative inflation.”
On Feb. 14, the Bank of Japan finally took Bernanke’s advice. Or a bit of it, anyway. The BOJ didn’t announce a 3 percent-4 percent inflation target, but it did set a target of 1 percent annual growth in the price level “for the time being.” That’s a big change from the bouts of grinding deflation that have plagued Japan for years. Consumer prices in Japan are actually 3 percent below where they were in mid-2008. Deflation raises the real cost of debt and makes people reluctant to spend, figuring prices will be lower if they wait….
Learn more at http://www.businessweek.com/asia/man-bites-dog-bank-of-japan-wants-more-inflation-02152012.html
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