Bernanke Should Follow the Advice He Gave Japan

In 2003, then Federal Reserve Governor Ben Bernanke urged the Japanese government to protect the Bank of Japan from capital losses on its massive holdings of domestic government bonds. In a speech to the Japan Society of Monetary Economics in Tokyo, he argued that "heated and unproductive debate" over the impact of capital losses on the BoJ's balance sheet would interfere with the rational conduct of monetary policy. Japan's central bank, he said, was insufficiently aggressive in its response to deflation because it had one eye wrongly trained on an accounting issue.