The Great Financial Crisis has exposed a deep chasm in economics and economic policy. No single institution is this crystallized more than at the Bank of Japan.

The former Governor, Shirakawa brought policy rates to nearly zero to combat deflation. His successor, Kuroda, took the central bank in the completely other direction. He has introduced three elements of unconventional policy in an institution that was wedded to orthodoxy.

These include an aggressive expansion of the central bank’s balance sheet through asset purchases. The assets being purchased are of greater risk than what other central banks have purchased, (including equities and REITs). Most recently the central bank introduced a negative deposit rate on what appears to be a modest amount of reserves (<20%).

The contrast between Shirakawa and Kuroda is great and has proved frustrating for the bureaucrats and technocrats play such an important role in the central bank. Japanese are well aware that the root of Shirakawa means white, and the root of Kuroda means black. The same drama is being played out in Europe.

Philosophically, the Bundesbank is not far from Shirakawa’s position, while the majority of the ECB is more similar to Kuroda. Even though Draghi quickly reversed the two rate hikes introduced by his predecessor, the contrast with Trichet was not as greater as seen in Japan. Trichet did initiate a sovereign bond buying program, liberalized collateral rules, oversaw ECB loans to Greece.

In many ways, the divide is a recapitulation of the debate between Hayek and Keynes. Shirakawa and German ordoliberalism does not seem far from Hayek position. The active monetarism of Kuroda is consistent with Keynesian thought and is cut of the same cloth as Draghi’s suit. 

The great Chinese pragmatist Deng Xiaoping famously noted that it does not matter if the cat is black or white as long as it catches mice. Therein lies the rub for Japan. Neither the white cat nor the black cat has caught mice. Neither Shirakawa’s monetary restraint nor Kuroda’s aggressive activism has succeeded in defeating deflation, putting the economy on more solid footing, or providing incentives to for the government reduce the mountain of sovereign debt, which is now surpassing 225% of GDP.   

One cannot help but wonder if the Bundesbank President Weber had replaced Trichet rather than Draghi, would inflation be closer to the ECB’s target? Would unemployment be lower? Would the northern creditor nations be more willing to recycle their surplus by buying the bonds of the southern debtor countries? Most would likely answer these questions in the negative.  

Nevertheless, whatever approach a central bank takes, it can be criticized for failing to deliver the goods. Shirakawa was criticized, and Abe may not be able to find a more un-Shirakawa successor than Kuroda. Although Kuroda does not have produced better results, the Bank of Japan’s balance sheet, at nearly 80% of GDP is more than three-times larger than the Federal Reserve or ECB’s balance sheets. Moreover, it is not simply the size of the balance sheet, but its composition contains considerable riskier assets than the Fed or ECB. The BOJ, for example, buys ETFs and REITs.