“Learning from one’s mistakes”, this is what Kuroda suggests in order to avoid another collapse.
A ‘no-limits’ monetary policy is not exactly the prevailing strategy among the world’s central banks, especially in the eurozone, where the European Central Bank (ECB) has one primary objective: to keep inflation at around 2%. Yet such a strategy is not wrong: ECB President Mario Draghi demonstrated as much when he fired his ‘bazooka’ in late January.
We discussed the role of monetary policy and much more with Haruhiko Kuroda, governor of the Bank of Japan.
Let’s start with a difficult question. Does ‘Abenomics’, the incentive package adopted in Japan to kick-start the economy, work or not?
The Japanese economy has gone through a period of negative growth in recent decades, but we’re certain that we will experience significant recovery in the long term thanks to Abenomics. Many want positive results immediately. They want our economy to start growing again just like that, but whenever we talk about the mentality of economic agents, we must be cautious and not create false expectations. We’ve always said that the benefits would be appreciable in the long term. As you yourself said, Abenomics is a package of measures and not a single magic bullet. It will take time.
What do you think of the eurozone’s management of the crisis from 2009 to today?
The eurozone has dealt with some things well and others less so. The latter, in particular, includes how slow it was to understand that the crisis in Greece could be resolved differently and that deflation could be a very tangible problem for heavily indebted economies. Now that Mario Draghi has begun his €1.1 trillion quantitative easing (QE) programme, I think the eurozone could bounce back. But Draghi is wise to remind everyone that without governmental backing, the ECB can do little. The eurozone must undergo reforms and overcome its current divisions: only by so doing can its monetary policy be effective and allow the euro economies to grow once more.
We often hear about the risk of ‘Japan Syndrome’ for the eurozone. Is there a chance of this happening?
It’s always interesting when the world’s central bankers, analysts and economists look at Japanese deflation. In my opinion, a comparison with the eurozone today makes no sense. There are too many differences, such as the openness of the two economies and their historical contexts. Today we are experiencing unprecedented levels of liquidity on the financial markets, yet investors still snub the eurozone. The question to ask is why?
OK, why?
Well, while it’s true that there is significant liquidity, it’s also true that there are numerous asymmetries. The US experienced the worst financial crisis since 1929, so they paused, cleaned up their banks’ balance sheets completely and started again. Japan was severely affected by the US crisis, then launched its own qualitative and quantitative easing programme, which in the long term will have a positive impact. The eurozone is lagging behind. Greater competitiveness and more long-term vision are required. Innovation can be fundamental for the recovery of the eurozone, as it has been for the US and could be for Japan.
Does the eurozone risk stagnation that might last for generations, as Joseph Stiglitz has been saying for some time?
I don’t believe that the eurozone risks such long-lasting stagnation. Much depends on the recently launched QE programme. If the ECB can successfully revive the economy, then this fearsome scenario will probably be averted. But it very much depends on whether EU governments realise that a better future can only be achieved through reform. The credibility of the central bank, along with the responsibility of governments and the will to build the future can achieve a great deal. The key is long-term vision. Always.
Lastly, the million-dollar question: will we ever return to the levels of risk seen prior to the collapse of Lehman Brothers?
That’s a tough one to answer. No, I don’t think we’ll ever return to a pre-Lehman Brothers situation. Because every crisis, every price bubble, every asymmetry is different from the next. There can be points of contact but technological and intellectual evolution always creates conditions for different kinds of crises. It’s not important to understand whether a new crisis will develop but where. And to develop mechanisms capable of isolating the crisis to a single area. Equally important is the ability to learn from our own mistakes. Crises and booms are very much part of human nature.
“Learning from one’s mistakes”, this is what Kuroda suggests in order to avoid another collapse.
