Mizuho Chief Market Economist Yasunari Ueno:
The chief duty of most central banks around the world is the maintenance of price stability. Some countries—including the USA, Australia, and New Zealand—have a dual mandate of price stability and maximum employment. Even in those cases, however, the central bank’s role is to maximize employment within the overriding priority of price stability. What about in Japan? The BOJ’s website has a section titled Bank of JapanFAQs in which it states: “The purposes of the Bank are to aim at achieving price stability and to contribute to financial system stability.” The two are not necessarily of equal importance. Article 1.1 of the Bank of Japan Act states: “The purpose of the Bank of Japan, or the central bank of Japan, is to issue banknotes and to carry out currency and monetary control.” Article 1.2 adds a further purpose: “Contributing to the maintenance of stability of the financial system.” Article 2 then states the”principle” of this currency and monetary control: “Achieving price stability, thereby contributing to the sound development of the national economy.”The Act appears to elevate “principle” above “purpose,” suggesting the BOJ’schief duty is to achieve price stability. This could be read to imply that macroprudential policy and financial market control are subservient to price stability.In other words, addressing market bubbles does not take priority over price stability in the management of monetary policy. The BOJ has acted as a “bubble buster” in the past by repeatedly tightening its policy settings, but subsequent events proved conclusively that this was a failure—which has influenced the wayother advanced-economy central banks approach policy. For example, the Fed is unlikely to respond to the current manufactured bubble in global share prices by tightening the central elements of its policy framework to deflate it. Rather, it regards action on asset prices and the financial system as the job of macroprudential policy and regulation, which it keeps separate from monetary policy.It has been interesting to note that several countries are now effectively adding to their central bank’s mandate.
Grant Robertson, the New Zealand finance minister, announced on 25 February that the Reserve Bank of New Zealand (RBNZ) would be required, from 1 March, to consider the impact on housing prices when making monetary and financial policy decisions. As noted above, the RBNZ already has a dual mandate of price stability and maximum employment. It now has a third obligation: its monetary policy committee must now take into account government policy relating to more sustainable house prices, while working towards its objectives. The government has introduced this requirement because surging house prices as a result of sustained, powerful monetary easing has become a divisive issue in New Zealand. finance minister Robertson said: “The committee will need to explain regularly how it has sought to assess the impacts on housing outcomes.”It has been reported that the New Zealand government had floated the idea of establishing a third mandate with regard to the impact of policy on house prices, but ultimately opted against formalizing the move. It backed off in the face of opposition from the RBNZ: according to Reuters, Governor Adrian Orr argued that “adding housing to the Bank’s mandate could make monetary policy less effective and impact financial market efficiency, adding that monetary policy alone could not fix the housing problem.”It hardly needs saying that the more complex a central bank’s mandate, the more likely it is that a policy introduced to achieve one element of it can have adverse effects elsewhere. The end result is likely to be a highly compromised set of policies, with monetary policy losing its “bite.”In the New Zealand case, the central bank might opt not to ease further (or to walk back from existing settings) because of the importance of discouraging further house price inflation. Conventional wisdom says such a move would take it further away from price stability and maximum employment. If house price stability were to be added to make a triple mandate, the New Zealand dollar might strengthen as investors took the view that the RBNZ was no longer in a position to ease further.This was presumably what Governor Orr worried about. We note another case in the UK, where Chancellor Rishi Sunak told parliament on 3 March that the Bank of England’s mandate would be updated to “reflect the importance of environmental sustainability and the transition to net-zero.” The government of Prime Minister Boris Johnson has already set a target of net-zero greenhouse gas emissions by 2050, and will now require the central bank to play its part. According to Kyodo News’s report, Chancellor Sunak reconfirmed the 2%inflation target but set out the importance the government attaches to environmental sustainability and achieving net-zero GHG emissions. The Bank will adjust its corporate bond-buying program within the coming few months, presumably by adding climate change to its checklist when reviewing bond issuers.ECB President Christine Lagarde was among the first central bankers to talk about their role in addressing climate change. The strategic review that is due to conclude before mid-2021 is expected to offer some guidance on how the ECB will involve itself in this area. One idea that is already being talked about is green QE: giving preference to green bonds (which generate funding exclusively for use in climate action projects) when purchasing as part of its QE program.
Green QE has already run into opposition within the ECB’s governing council. Bundesbank President Jens Weidmann declared himself against it on 29 October 2019, before Christine Lagarde took over. “Our mandate is price stability…there is little understanding why the fight against climate change should only continue during periods of low inflation.” The implication in the second part of this remark is that it is simple for the ECB to prioritize greenness in its corporate bond buying and eligible collateral standards when prices are low and monetary policy settings are loose, but harder in practice to give due consideration to climate change when inflation is accelerating and policy is being tightened. Weidmann also said the choice of measures to fight climate change is a task for elected governments and that central banks lack the democratic legitimacy to pursue environmental goals. Isabel Schnabel, a fellow German who sits on the ECB’s executive board, said on 28 September last year that the Bank could step up its purchases of green bonds. Japan is not wholly immune from the influence of such shifts overseas. BOJGovernor Haruhiko Kuroda told the lower house budget committee on 5 March that climate change exerted a significant impact on the real economy and therefore had consequences for the central bank’s mandate. He said he and his colleagues continued to talk about green bond purchases because of the impact on micro-level resource allocation. The results of the BOJ policy review, due to the published on the19th, may offer some indication of how the Bank views its position in relation to climate change. Were it to show itself willing to take action in addressing climate change, it would probably cite Article 4of the Bank of Japan Act, which talks about the need to “always maintain close contact with the government and exchange views sufficiently.”The Japanese version of being caught between two stools refers to an attempt to catch both a horsefly and a bee and ending up with neither. Saddling a central bank with a dual or triple mandate creates a similar risk. If multiple objectives are set, it is essential to prioritize them clearly.