Wanted: Banker to 'inflate' Japan
Colin Donald
National Post

Wednesday, January 22, 2003

Wanted: Aggressive and creative central banker to save world's second-largest economy from implosion. No previous experience a bonus. Under-65s preferred, but not essential (this is Japan). Successful candidate will be granted a licence to print money. Must be prepared to use it.

The biggest decision of 2003 for the thwarted reformist government of Junichiro Koizumi will be the replacement of Bank of Japan (BoJ) Governor Masaru Hayami, whose term expires in March. With an announcement expected any day, all eyes in Tokyo are on a handful of undeclared candidates, and speculation is buzzing that Japan may be the first G7 nation to rip up the central bankers' rules on money supply.

With the country seemingly trapped in negative or negligible growth, and the so-called economic czar Heizo Takenaka blocked by conservatives in the governing Liberal Democratic Party (LDP), a desperate Prime Minister needs to create inflation to release Japan from its deflationary "spiral of death."

With all the conventional fiscal and monetary tools tried to no effect, Koizumi has hinted that he favours an out-of-the-box thinker at the BoJ to get some life back into the economy. An inflationary environment, where goods are assumed to become pricier next year rather than cheaper, is seen as the best way to draw hoarded yen from a populace fretting over job security and shrinking pensions.

Paul Krugman, a long-time advocate of an inflationary policy, posits an inflation target of 2%, from a monetary base increase of 15%, though like many gaijin (foreign) economists, he believes this to be a minimum figure For such a risky strategy (the inflationary tap could be hard to turn off) Koizumi and Takenaka need a bank boss who will, unlike Mr. Hayami, fall in with their strategy. But Hayami's successor must also be independent-minded enough to resist the nexus of financial bureaucrats and allied politicians who oppose radical solutions, and even refuse to admit the gravity of the crisis. Not surprisingly, nobody is exactly touting for the post.

An unconventional choice -- from the private sector or academia -- might be better placed to cut through the obligations and conventions that clog Tokyo's decision-making processes.

Whoever wins must be able to survive Tokyo's poisonous bureaucratic briefing wars. In the buck-passing atmosphere that has followed the Bubble, the BoJ has been a handy scapegoat. It is attacked, domestically and abroad, for everything from excessive caution -- as in its reluctance to lower interest rates to zero until too late to make a difference -- to wild gesturing, as in its October decision to buy shares from banks' equity portfolios.

Having used aggressive interest rate hikes to slam on the brakes in the late 1980s, the bank has, with a couple of ill-timed exceptions, practised quantitative easing. But the bank's many critics say it has always been "behind the curve," hence 13 straight years of asset deflation. Defenders counter it is the bad loans crisis in the banking system that negates the benefits of ultra-low interest rates, and the BoJ has done all that a responsible central bank could.

But the definition of what is "responsible" has shifted, and drastic measures now look appropriate. The government itself tacitly admits that the Bank of Japan alone can halt the decline. Last month, it leaked news of a Koizumi approach to the bank on improving relations once the stubborn Mr. Hayami is finally prised out of the post.

Once a tame offshoot of the mighty Ministry of Finance, the BoJ has used the independence granted in 1998 in what many saw as a self-righteous and irrelevant exhibition of fiscal rectitude. Hayami refused to loosen the monetary reigns until he saw "concrete evidence" of corporate restructuring. This led to an absurd stand-off with LDP lawmakers and allied bureaucrats, who refused to promote necessary restructuring until deflation had been attacked. The result has been squabbling and paralysis, turning the prospects of a short-medium term Japanese recovery into an international joke.

What is certain is that failure to use the last 13 years of low growth to develop a thriving service sector has left Japan deflating itself to death. New thinking about the money supply alone would not bring about the restructuring of a vast industrially based economy too expensive and inflexible to prosper in competition with China and other rising countries.

But the big hope for 2003 is that a concerted attack on deflation led by the Bank of Japan might make this essential transition less painful to endure. One economist has likened the Japanese central bank's reluctance to use the inflation route to a doctor denying brandy to a hypothermia victim in case it turn him into an alcoholic. Whoever steps up to succeed Mr. Hayami may have to dare to declare happy hour at the Bank of Japan.

Colin Donald lectures in international relations at Baiko University in Shimonoseki, Japan.

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