This is an outstanding book on a topic of great importance. Monetary policy has arguably become the single most important economic policy tool that governments use to address a wide range of macroeconomic and financial objectives. Japan is no exception, especially under the Abe administration (2012–present), and this book provides the most detailed and insightful account written in the English language of the ideational and political institutional contexts that inform the Bank of Japan’s (BOJ) decisions about monetary policy in the contemporary era.
The central puzzle of Taming Japan’s Deflation is why the BOJ was slow to adopt unconventional monetary policy in the wake of the 2008 global financial crisis (GFC). Whereas the Federal Reserve Bank and the Bank of England adopted several rounds of large-scale quantitative easing measures starting in 2008, the BOJ only began to adopt similar measures after the Liberal Democratic Party regained power and Kuroda Haruhiko was appointed as the new BOJ governor in 2013. For the authors, this delay is especially perplexing given the fact that in Japan deflation began as early as the late 1990s, well before the GFC. Moreover, the country experienced a greater drop in economic output at the onset of the GFC than did the United States or the Eurozone, and it also suffered another sharp drop after the March 2011 triple disaster: the earthquake, tsunami, and nuclear meltdown. In the face of a prolonged deflation punctuated by periods of sharp economic decline, Japan arguably represents a case where quantitative easing was most needed but was least forthcoming.
After briefly identifying and rejecting several alternative explanations for Japan’s monetary policy outcomes in Chapter 2, the authors present their argument in Chapter 3. Situating themselves broadly within social constructivist approaches that emphasize the role of ideas, the authors focus on the role of entrenched policy ideas within the BOJ’s monetary policy network to explain Japan’s reluctance to embrace unconventional monetary policies in the aftermath of the GFC. This study defines policy ideas as “a set of shared beliefs about policy goals, priorities, and causal relationships” (p. 2), and the authors draw a clear contrast between their approach and those that embrace rationalist explanations, which focus on material interests to explain policy outcomes (pp. 43–51). According to the authors, their approach makes sense not only because monetary policy is generally made by central banks that enjoy institutional independence in making economic policy, as in the case of Japan, but also because the policy preference of central bankers cannot be easily attributed to material incentives, given the complexities of the economy and the importance of relying on cognitive maps to pin down and establish causal relationships. Under these conditions, policy preferences and outcomes are presumably more contingent on prior ideas than on material incentives.
The subsequent chapters add empirical flesh to this theoretical argument. Chapter 4 traces the historical evolution of the BOJ and identifies three central elements that have come to define its worldview regarding monetary policy: a premium on price stability, the belief that monetary base expansion has a limited ability to shape economic outcomes, and an expansive interpretation of BOJ independence. Chapter 5 details the institutional structure of the BOJ-centered monetary policy network after passage of the 1997 Bank of Japan Law; it highlights the comparatively closed nature of Japan’s monetary policy network and the prominent role played by the BOJ bureaucratic apparatus within this network. Chapter 6 offers an innovative quantitative analysis that codes transcripts of the BOJ board meetings from April 1998 to April 2014 to measure the board members’ revealed preferences about inflation and deflation. The authors then use these measures to demonstrate through regression analysis that the more the BOJ board members expressed hawkish views toward inflation, the less they expanded the monetary base. Chapter 7 follows up on this quantitative analysis with a case study approach that covers the same period, focusing on instances of key BOJ policy decisions; Chapter 8 focuses on the efforts of the Abe administration after the LDP regained power.
The book’s mixed-methodological approach offers a nice combination of richness and rigor, but it also raises several methodological and theoretical questions. In the quantitative analysis presented in Chapter 6, for example, the key independent variable measures whether BOJ board members expressed positive, neutral, or negative sentiments in their use of the words “inflation,” “deflation,” and ”price” to track the extent to which the BOJ’s policy worldview permeated the debates at each meeting. Change in the monetary base is used as the dependent variable. Although the statistical correlation proves to be significant and robust, the independent variable appears to only capture one component of what the book defines as the BOJ’s worldview: it excludes other components such as the BOJ’s doubt about the efficacy of monetary base expansion. Undoubtedly, these components often covary, but not necessarily so, and the reader is left wondering whether and to what extent trade-offs emerge among them, how those trade-offs are adjudicated when they occur, and what the impact of this adjudication is on monetary policy outcomes.
By and large, these questions are addressed in the subsequent case study chapters, which offer a more nuanced and comprehensive account of the various elements that make up the BOJ worldview. This structure nicely demonstrates both the utility of a mixed-methodological approach and the authors’ intellectual breadth in using and integrating both approaches. But in capturing the characteristics and continuity of this broader BOJ worldview in greater detail, Chapter 7 raises the question of how one explains variations with a constant. That is, given the continuity of the BOJ worldview, how do we explain changes in monetary policy outcomes during this period? The authors’ answer is that there was not much variation in monetary policy. This is reasonable, but uncharitable. Adopting a zero interest-rate policy in 1999 broke new ground, as did the adoption of quantitative easing from 2001 to 2006 incrementally as the BOJ navigated through uncharted territory.
On hindsight, it is clear that the BOJ could have done more during this period to try and combat deflation. But the explanation presented in Chapter 8 for how and why monetary policy changed during this period appears to be less about the role of ideas than about the role of the prime minister and the ruling political party after 2012. This raises questions not only of whether central bank independence is as significant as many have suggested, but also about when ideas matter and when they do not. It is not clear whether the role of ideas mattered as much or in the same way as it did in the prior period. Presumably, ideas still mattered but in a different way, but the reader is left wanting to know more about these differences.
Finally, it would have been useful to hear more of the authors’ own views about the efficacy of unconventional monetary policy. The book remains relatively silent on this matter in general and about “Abenomics” in particular. Granted, this omission makes sense because it is not the central problematique this book seeks to address. But given the authors’ expertise on this issue, readers would have profited from learning more about where they stand on the heated debate about the use of unconventional monetary policy in Japan and elsewhere.
