This article analyzes the contrasting policies of the ECB, FRB, and Bank of Japan. While Europe and the United States prioritize employment and move toward rate cuts, the BOJ remains fixated on rate hikes under political and media pressure. Nobel laureate Paul Krugman stresses that a weak yen is actually beneficial for Japan, highlighting the misguided reactions of Japanese policymakers and the media. The piece exposes misunderstandings about monetary policy, inflation, and central banking, offering essential insight for global readers.

Paul Krugman, recipient of the Nobel Prize in Economics, says coldly, “A weak yen is advantageous for Japan—why is everyone making such a fuss?”
June 15, 2024.
The following is from “How to Solve Japan’s Problems” by Yoichi Takahashi, published in the evening edition of the Hokkoku Shimbun on June 12, titled “From the ECB, Which Has Begun Rate Cuts.”
I have repeatedly stated that Yoichi Takahashi and Hideo Tamura are true experts in economics.
This article once again proves that Yoichi Takahashi is Japan’s foremost economist.
It is essential reading not only for the Japanese people but for readers around the world.
Emphasis in the text is mine.
Prioritizing job security, just like the FRB.
In stark contrast to the Bank of Japan’s direction toward rate hikes.
On the 6th, the European Central Bank (ECB) decided to begin cutting interest rates.
The timing of the U.S. Federal Reserve Board’s (FRB) rate cuts is also drawing attention, highlighting the difference in policy direction from the Bank of Japan.
The ECB’s inflation target, based on the EU Harmonized Index of Consumer Prices (year-on-year), is 2%.
When it began tightening monetary policy in July 2022 by raising the policy rate from 0.25% to 0.75%, the inflation rate was 8.9%.
Thereafter, the policy rate was raised step by step until it reached 4.75% in September 2023.
Meanwhile, inflation peaked at 10.6% in October 2022, then quickly began to decline, reaching 2.6% in May 2024.
This movement is precisely “behind the curve” monetary tightening.
However, to be frank, monetary tightening should have begun earlier, around early 2022, when inflation surged to around 6%, rather than waiting until it hit double digits.
For reference, the FRB’s inflation target, based on the core personal consumption expenditures price index (year-on-year), is 2%.
When monetary tightening began in March 2022, raising the policy rate from 0.25% to 0.5%, the inflation rate was 5.4%.
The policy rate was then gradually raised until it reached 5.5% in July 2023.
Inflation reached 5.5% in September 2022 but then began to decline, falling to 2.8% by April 2024.
The FRB’s policy response is also a typical example of being behind the curve, but the timing is not problematic.
Does the ECB expect inflation to rise going forward, or to fall?
If it is expected to rise, there is almost no room for unemployment to fall further, as the unemployment rate in April of this year reached a record low.
On the other hand, if inflation is expected to fall, there is a possibility that the unemployment rate will rise.
In that case, from the perspective of employment security, cutting interest rates is reasonable and fully within the responsibility of a central bank.
There are two types of central banks.
The first prioritizes employment security.
The second prioritizes the management stability of financial institutions.
The first is cautious about raising interest rates, while the second tends to push rate hikes aggressively.
It has become clear that the ECB belongs to the first category.
Since the FRB has also announced a policy direction toward rate cuts, it too belongs to the first category.
In contrast, the Bank of Japan is a typical example of the second category.
As long as inflation is not likely to deviate significantly from the 2% target for the time being, the Bank of Japan should not raise rates immediately.
However, because of “yen-weakness bashing,” the Bank of Japan remains inclined toward rate hikes.
Paul Krugman, recipient of the Nobel Prize in Economics, has coldly remarked, “A weak yen is advantageous for Japan—why is everyone making such a fuss?”
This was a jab at the laughable response of the government and the mass media, yet the domestic media cannot even mention it properly.
Recently, new traps have also appeared.
When I referred to the latent gains in the Foreign Exchange Fund Special Account, arising from the weak yen, as “foreign exchange buried treasure,” some have begun referring to the latent gains on the Bank of Japan’s holdings of exchange-traded funds (ETFs) as “BOJ buried treasure,” even implying they should be sold.
However, such sales would constitute monetary tightening and effectively a rate hike, so caution is required.