Bank of Japan ; Monetary policy ; Monetary policy - United States

John P. Judd

Michael Hutchison

English

Research Papers in Economics

FR8SF WEEKLY LETTEA
Number 92-15, April 10, 1992
Monetary Announcements:
The Bank of japan and the Fed
Recessions in the United States tend to be more
severe and to last longer than those in Japan. A
number of explanations, including greater wage
flexibility and more stable employment practices
in Japan (Moreno 1992), have been put forth to
account for this difference.
A third explanation focuses on the stability and
predictability ofJapanese monetary policy.
Generally, a more predictable monetary policy
reduces uncertainty about future inflation. And
since inflation is an important component of
many economic decisions, reducing inflation
uncertainty means that decisions will be revised
less often, and economic activity will be less
volatile.
The Bank ofJapan has consistently demonstrated
a strong commitment to fight inflation since the
late 1970s. But views differ on whether the per-
ceived stability and predictability of monetary
policy in Japan hinges simply on the credibil-
ity of this commitment, or whether it also de-
pends on the means through which policy is
implemented.
Specifically, it has been argued that the Bank
ofJapan's monetary "targets" have played an
important role in its success. By announcing
monetary "targets" in advance, and consistently
achieving them, the Bank ofJapan may limit the
size ofdestabilizing monetary policy and infla-
tion "surprises," thereby providing an environ-
ment more conducive to output stability. This
argument also asserts that since the Federal
Reserve has adhered less consistently to its mon-
etary ranges, it often "surprises" the economy
with unexpected policy actions that intensify
economic fluctuations.
In this Letter we report the results of a study
(Hutchison and Judd 1992) in which we evalu-
ate the information value of the monetary projec-
tions of the Bank ofJapan (BoJ) and the Federal
Reserve (Fed). We find that the Boys projections
contain relatively little information that could
limit the size of monetary policy "surprises;' es-
pecially when compared with Fed projections.
Although Japanese monetary policy has achieved
low and stable inflation, and this most likely has
contributed to economic stability, we find that
the announcement of projections by the BoJ per
se has not played an important role in this suc-
cessfuI record.
Monetarv announcements
The BoJ began quarterly public announcements
of projected growth in the monetary aggregate
called M2 + CDs in July 1978. Although these
announcements are cast in the form of annual
period projections, they actually extend only one
quarter into the future. Each quarter, the base for
the new projection is the actual level of M2 +
CDs three quarters earlier. Hence, the forecasted
annual growth rates are averages of three quar-
ters of realized, and one quarter of projected,
money growth.
it has been noted repeatedly by BoJ officials that
the announced figures should be interpreted as
projections rather than targets. As projections,
they represent the Boys estimates of the money
growth consistent with policy settings (defined in
terms of a short-term interest rate) and macro-
economic developments in the past, as well as
those anticipated over the next quarter. They are
not targets because the BoJ does not routinely at-
tempt to offset differences between actual and
targeted money.
In the U.S., the establishment of ranges for the
monetary aggregates first was mandated by Con-
gress in 1975. Monetary ranges have been set for
several different monetary and credit aggregates
at anyone time. Contrary to the Japanese prac-
tice, the Fed establishes ranges four quarters into
the future, rather than just one quarter ahead.
Since 1978, the Fed has established ranges inFRBSF
February of each year from the fourth quarter of
the previous year to the fourth quarter of the cur-
rent year. Thus while the BoJ permits the base of
its ranges to drift each quarter, this generally is
permitted only once per year in the-U.s.
The Fed's record in meeting these annual ranges
has been compared unfavorably with the BoJ's
record in meeting its publicly announced projec-
tions (Meltzer 1986). These comparisons have
been interpreted as suggesting that the BoJ has
followed a more consistent and predictable mon-
etary policy than has the Fed during the last 15
years. However, those comparisons are problem-
atic, since the BoJ figures are really one-quarter-
ahead projections, while the Fed's ranges extend
one year into the future. Moreover, by permitting
base drift each quarter, the BoJ frequently allows
deviations between actual and projected money
growth to become permanent.
Better comparisons
To begin to resolve the comparability problem
with the BoYs "annual" money projections, we
turned to the Fed's one-quarter-ahead projec-
tions, which are published in the Records of
Policy Action ofthe FOMC (Board of Governors
ofthe Federal Reserve System). Between late
1979 and early 1983, these projections were
short-run targets for monetary policy. In recent
years they have assumed a role that is similar to
the role ofthe BoJ's projections, in the sense that
they are growth rates expected to be consistent
with a policy defined in terms of "reserve market
pressure:' The latter concept roughly corresponds
to levels of the federal funds rate. Growth rates
of the monetary aggregates are projected on the
basis of an expected path for interest rates and
projections for income prices. Thus these money
projections potentially contain useful information
about the Fed's policy plans over the next quarter.
But unlike the BoJ's projections, the Fed's projec-
tions are not announced to the public while they
are in force. Instead, they are published a few
days after the FOMC meeting following the one
at which they were chosen--a lag of around six
weeks.
To make the Fed's one-quarter-ahead projections
and the BoYs projections more comparable, we
reconstituted the BoJ figures for M2 + CDs into
one-quarter-ahead projections by removing the
three quarters of actual data from the "annual"
projections. We then compared the accuracy of
the BoYs projections of M2 + CDs with the ac-
curacy of the Fed's short-run (one-quarter-ahead)
projections for M1 and M2. (M2 is the most
closely comparable u.s. aggregate with the Jap-
anese M2 + CDs.) The U.S. data were grouped
into two sample periods: 1980.4-1983.1, when
the Fed was targeting M1, and 1983.2-1988.3,
when the Fed de-emphasized monetary targeting
and focused mainly on M2 as a policy indicator.
Using several standard statistical measures (for
example, root-mean-squared error), we found
that the Fed was more accurate in some compar-
isons, and the BoJ did better in others. Overall,
the two central banks were quite similar in the
accuracy of their projections of money growth.
Information value
However, simply knowing the accuracy of these
projections does not tell the whole story of how
much they reduce the size of monetary policy
"surprises" in Japan, or could reduce "surprises"
in the u.s. Assessing the information content of
the central banks' projections involves estimating
the extent to which they add something to fore-
casts of money growth that couId be made on
the basis of other publicly available information
(such as lagged values of interest rates, prices,
and income). In other words, no matter how ac-
curate the central banks' projections are, they
will not reduce the size of monetary policy sur-
prises unless they tell the public something it
does not already know. Thus, we ask the ques-
tion, do the central banks' projections improve
the public's forecast of monetary policy actions?
To assess empirically the marginal contribution
ofthe central banks' projections, we developed
a time-series forecasting model of money growth
for the u.s. and Japan, using the information
(other than central bank projections) available to
the public at the time the forecasts were under-
taken. Using this model, we compared the accu-
racy of our money forecasts with the central bank
money projections. Our results suggest that in-
cluding the BoJ projection in the forecasting
model does not add significant information use-
ful in forecasting future Japanese money growth.
By contrast, the Fed's projections do make a sig-
nificant contribution to forecasting U.s. money
growth over and above the information that was
available publicly.
Because of the larger marginal contribution of
the Fed's projections compared with that of theBoard of Governors of the Federal Reserve System.
Federal Reserve Bulletin, various issues.
Moreno, Ramon. 1992. "japan's Recessions:' FRBSF
Weekly Letter (March 6).
Meltzer, Allan H. 1986. "Lessons from the Experience
of japan and the United States undei Fixed and
Floating Exchange Rates:' Bank ofJapan Monetary
and Economic Studies (October).
Hutchison, Michael, and john P. judd. 1992. "Central
Bank Secrecy and Money Surprises: International
Evidence:' Review of Economics and Statistics
(February).
John P.Judd
Vice President and
Associate Director
of Research
References
Michael Hutchison
Associate Professor,
University of California,
and Visiting Scholar, FRBSF
Rather, the steadfast commitment of the Bank of
japan to an objective of low inflation over the
long run, despite changing economic and politi-
cal circumstances, seems a more fundamental
reason for the excellent performance of the
japanese economy.
Conclusions
Our analysis suggests that the Fed's projections
provide three times more information value to the
public than do the Boj projections. The Boj pro-
jections per se seemingly provide little informa-
tion about future money growth beyond what is
easily derived from alternative, and readily avail-
able, sources of information.
Boj, the information content ofthe Fed's unan-
nounced projections is far greater than the pub-
liclyannounced BoJ projections. In particular,
the reduction in the standard error of money
surprises associated with the Fed projections is
about 1Y2 percentage points (annual growth) ver-
sus less than Y2 percentage point for the Boj
projections.
Thus it appears doubtful that the Boj monetary
announcements per se have materially reduced
the size of money surprises or contributed signif-
icantly to inflation and output stability in japan.
We are left with the somewhat paradoxical result
that the projections that are not immediately
disclosed (the Fed's short-term monetary paths)
potentially are valuable in reducing monetary
policy surprises, while the projections that are
immediately disclosed (the Boj) provide relatively
little new information to the public.
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DATE NUMBER TiTlE AUTHOR
10/25
11 /1
11/8
11/15
11/22
11/29
12/13
12/20
1/3
1/10
1/17
1/24
1/31
2/7
2/14
2/21
2/28
3/6
3/13
3/20
3/27
4/3
91-37
91-38
91-39
91-40
91-41
91-42
91-43
91-44
92-01
92-02
92-03
92-04
92-05
92-06
92-07
92-08
92-09
92-10
92-11
92-12
92-13
92-14
Earnings Plummet at Western Banks
Bank Stock Risk and Return
The False Hope of the Narrow Bank
The Regional Concentration of Recessions
Real Wages in the 1980s
Solving the Mystery of High Credit Card Rates
The Independence of Central Banks
Taxpayer Risk in Mortgage Policy
The Problem of Weak Credit Markets
Risk-Based Capital Standards and Bank Portfolios
Investment Decisions in a Water Market
Red Ink
Presidential Popularity, Presidential Policies
Progress in Retail Payments
Services: A Future of Low Productivity Growth?
District Agricultural Outlook
The Product Life Cycle and the Electronic Components Industry
Japan's Recessions
Will the Real "Real GDP" Please Stand Up?
Foreign Direct Investment: Gift Horse or Trojan Horse?
U.s. International Trade and Competitiveness
Utah Bucks the Recession
Zimmerman
Neuberger
Pozdena
Cromwell
Trehan
Pozdena
Kim
Martin/Pozdena
Parry
Neuberger
Schmidt/Cannon
Zimmerman
Walsh/Newman
Laderman
Schmidt
Dean
Sherwood-Call
Moreno
Motley
Kim
Glick
Cromwell
The FRBSF Weekly Letter appears on an abbreviated schedule in June, July, August, and December.

974-2246, Fax (415) 974-3341.OU.,6 \'J 'O)SPU~JJ u~S WLL xog ·O·d O)SI)UOJ:;j UOS JO ~uo8 aAJaSa~ IOJapa:;j ~uaw~Jodaa 4)Joasa~ Index to Recent Issues of FRBSF Weekly Letter

Monetary announcements: the Bank of Japan and the Fed

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Monetary announcements: the Bank of Japan and the Fed

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