Image source: PixabaySome people have asked why I supported Japan’s decision to raise their inflation target from 0% to 2%. After all, money is roughly neutral in the long run, and by 2013 Japan had mostly adjusted to its near-zero inflation rate.I made a couple of arguments. Central banks tend to use interest rates as a policy instrument, and this works better if nominal rates are not stuck at zero. In addition, Japan’s equilibrium real interest rate was so low that the Fisher effect is not fully operative. Raising inflation from 0% to 2% might only raise nominal interest rates from zero to 1%, or even less. This would help public finances. A 2% inflation rate would also lead to a smaller central bank balance sheet.Bloomberg has an article where new BOJ Governor Kazuo Ueda makes some similar points:“The most obvious benefit of a slightly positive inflation rate is a larger room for monetary policy responses to an economic downturn,” Ueda said in a speech Monday at a conference hosted by the Keidanren, Japan’s biggest business lobby, in Tokyo. . . .

While Ueda refrained from dropping a clear hint on the timing of any potential policy change, he joins his deputy Ryozo Himino in highlighting some of the benefits that would come in a world without negative rates, including an improvement in net interest income.

I’m not certain which net interest income he’s referring to, but he clearly agrees that the Fisher effect is not fully operative.I’ve also argued that it is wage inflation that matters, and without wage inflation any price inflation is transitory. In the US, the recent focus is on getting wage inflation down to a level consistent with 2% inflation. But as Ueda points out, Japan needs higher nominal wage growth to ensure that recent price inflation is sustainable:

The central bank kept the world’s last negative rate at a policy meeting last week. Ueda said Monday that a key point to watch is whether wages will continue to rise “markedly” in next year’s annual spring wage talks.

[Recall that I’m not a hawk or a dove. It depends on the situation. Lower wage growth in America, higher in Japan.]Prime Minister Abe switched to a positive inflation policy at the beginning of 2013. Since that time, inflation has averaged a little over 1%. That’s well below the BOJ’s 2% target, but far better than the deflation that existing prior to 2013. And despite the higher inflation, short-term interest rates remain at zero. For Japan’s fiscal authorities, this is like picking up 10,000 yen notes off the sidewalk.I’m glad to see that Ueda is continuing Kuroda’s policies at the BOJ.PS. Japan’s NGDP has also been increasing in recent years, a sign the higher inflation is not just reflecting high import prices due to a weaker yen.More By This Author:Nemo Judex In Causa Sua Don’t Pigeonhole Me The Global Distribution Of AI Talent