نقش سیاست پولی در اقتصاد تقلیل قیمتها : موردی از ژاپن

In this paper we review the role of monetary policy for a country facing deflationary pressure based on the recent experience of the Japanese economy. We discuss economic background of inflation policy in Japan and analyze the impacts of the policy. We made simple calculations regarding how much the debt of selected companies and government can be reduced by mild inflation. Noting that the Fisher effect does not work perfectly under liquidity traps, the effect of inflation on debt issue appears quite large. To maintain controllable stable inflation, inflation targeting is a good candidate for the policy rule. J. Japan. Int. Econ., December 2000, 14(4), pp. 238–260. Graduate School of Economics, University of Tokyo, 7-3-1 Hongo, Bukyo-ku, Tokyo 113-0033, Japan Copyright 2000 Academic Press.

The macroeconomic performance of the Japanese economy in the 1990s provides an interesting case on the role of monetary policy in a deflationary economy. Despite the series of aggressive fiscal and monetary stimulating policies, the Japanese economy could not recover from deep recession. Rather, as a result of these policies, the short-term interest rate, the policy target of the monetary policy of the Bank of Japan, fell to almost zero, and the government debt accumulated to a historically high level. There seems to be no room for further stimulating the stagnant economy. Paul Krugman’s model of liquidity traps (Krugman, 1998) provoked controversy on the role of monetary policy in a deflationary economy. According to Krugman, the present state of the Japanese economy is in a liquidity trap. In contrast to the oldfashioned Keynesian view that monetary policy is ineffective under liquidity traps,Krugman pointed out that an aggressive monetary policy under which the central bank commits to sustained inflation for a certain length of time is quite effective for freeing the economy from the liquidity trap. He suggested that 4% inflation for 15 years is necessary for the Japanese economy to recover from the liquidity trap.2 In Japan there have been increasing requests for economic policies generating some modest inflation. There are some divergent views on this inflation policy: some have Krugman’s policy formula in mind, but some have a completely different one in mind. The idea of inflation policy originally emerged in the early 1980s, when the Japanese government faced a serious government debt issue. Inflation, at that time, was considered an effective way to decrease the real value of government debt in a short period. Although the idea could not obtain much consent at that time, the economic environment in the late 1990s was far more favorable to the argument for inflation policy than that in the early 1980s. The government debt was much higher in the late 1990s than in the early 1980s. Furthermore, a large number of private firms, which now faced serious balance sheet losses due to a crash in stock and land prices, saw that an inflationary economic environment was far better for their balance sheet correction than a deflationary economic environment. It has also been pointed out by many people that, even if intentional inflationary policy is not taken now, skyrocketing government debt will trigger serious inflation in some point in the future. The lack of sustainability of government debt has alarmed an increasing number of people. The fact that the market interest rates on long-term government bonds are still very low indicates that the market still believes in the sustainability of government debt. So, it may be too early to raise the question of sustainability on government debt. However, based on experiences of various countries in the past, it is very rare for a country whose government debt–GDP ratio exceeded a certain levels to decrease that ratio without causing some inflation. In fact, some casual observations on the political aspect of the monetary policy in Japan in previous years suggest that there will be increasing pressures on the Bank of Japan from the government as well as the corporate sector to introduce stronger monetary measures which will generate inflation: it may even include the purchase of newly issued government bonds by the Bank of Japan, which is banned by the present Finance Law. In the process of accumulating government debt, interest rates on long-term government bonds may increase, and in that case, the political pressure on the Bank of Japan to increase its purchase of long-term government bonds will become very strong. This is a typical scenario of increasing government debt leading to inflation. Some people advocating inflation policy claim that present intentional modest inflationary policy is far better or less evil than forced and uncontrolled inflation in the future. Discussion on inflation policy provoked various interesting questions on the role of monetary policies in a deflationary economy. Such issues were raisedas “Is it possible to generate inflation or inflationary expectation under the condition of liquidity traps?” or “What policy measures are necessary beyond the traditional monetary policy measures in order to further stimulate the economy by monetary policy, and whether such policy measures are effective and meaningful?” Many people, especially those in the Bank of Japan, are doubtful of inflation policy.3 They claim that it is difficult to increase monetary supply under a liquidity trap, since additional supplies of base money through market operations are absorbed in the banking sector as excess reserves without changing money supply. It is also thought that, even if the monetary policy can generate inflation, the level it generates is very difficult to control: such instability in a macroeconomy is not desirable. Some suggest that inflation policy may even trigger uncontrolled inflation. The questions raised are not only purely economic but also political. When the central bank faces strong political pressure regarding its monetary policy, isn’t such a policy rule as inflation targeting necessary to secure independence of the central bank? To set some visible policy target may be effective for the central bank to keep its independence from political pressures. Inflation targeting can be such a policy target.4 Again, there are some arguments against inflation targeting. According to the views against inflation targeting, it is not easy to achieve a target level of inflation under a liquidity trap due to the reasons raised above, and price index is not a very reliable policy target for monetary policy. Some even claim that inflation targeting is geared for countries that control inflation and is not useful to escape from deflation. This paper discusses the theoretical and empirical backgrounds of inflation policy based on the recent experience of the Japanese economy, which is quite unique in many respects. Therefore, an overview is useful for better understanding the role of monetary policy in a deflationary economy. The structure of this paper is as follows. In Section 2 we overview theoretical models of liquidity traps.We present two types of liquidity trap models: The mechanisms leading to a liquidity trap and a scenario for recovering from one is different between the two cases. In Section 3 we consider inflation policy, under which an inflationary environment can mitigate debt issues from the private sector as well as from the public sector. The Fisher effect is a crucial factor for a possible debt reduction process under inflation policy. We also show some simple calculation results for the possibility of debt reduction of the private and public sectors. In Section 4 we discuss the role of a monetary policy and consider what a monetary policy can and cannot achieve. Finally, brief concluding remarks are provided in Section 5.

In this paper we review the role of monetary policy for a country facing deflationary pressure based on the recent experience of the Japanese economy. Wediscuss economic background of inflation policy in Japan and analyze the impacts of the policy. The Japanese economy is currently in a liquidity trap. Expanding fiscal deficits and historically high government debt make it difficult to rely further on fiscal policy. As pointed out by Krugman, a certain type of monetary policy is quite effective in this circumstance; what is necessary is not temporary monetary expansion but commitment to continuing monetary expansion for a certain period of time and to some inflation target. It should be noted that liquidity traps arise for various reasons. The case analyzed by Krugman is the one where the IS curve shifts due to structural reasons such as an aging population. Under this condition a negative real interest rate is needed to escape from the liquidity trap. However, the liquidity trap can also arise from a monetary reason and the scenario of escape from the trap is different. In Section 2 we illustrate the case where deflationary expectation leads the economy to a liquidity trap. We can also think of a case where the economy gets into a liquidity trap because of falling asset prices, although we do not show any explicit model for this case in this paper. The channels for escaping from liquidity traps are different depending on whether the trap is from a structural factor or a monetary factor. Another important aspect of liquidity traps is that the Fisher effect does notwork perfectly, which is crucial when one considers the possibility of correcting balance sheet loss in the private as well as the government sector by relying on inflation. If nominal interest rates increase by the same rate as inflation under the Fisher effect, inflation will not change the real value of net debts of corporate sector and the government. However, under liquidity traps, nominal interest rates will not rise as much as an inflation rate. We presented simple calculations concerning how much the real value of debt is of selected companies under certain hypothetical inflation rates and found that a substantial amount of debt reduction is expected under mild inflation. A similar calculation was made regarding government debt, and the results show that the debt reduction effect of mild inflation is quite large for government debts. If inflation or inflation expectation can be generated by a monetary policy, the policy will be effective in freeing the economy from a liquidity trap. The question is whether a monetary policy can and should generate inflation or inflation expectation. As we have seen in Section 4, the traditional channels for monetary policy such as the operation in the interbank market are not effective under liquidity traps. Economists for the Bank of Japan claim difficulty in raising the inflation rate through the traditional monetary policy, that is, operations in an interbank market. It is necessary to consider alternative channels for monetary expansion such as the purchase of commercial papers or the purchase of long-term government bonds in the market. Use of these new channels mayweaken fiscal discipline. The government will depend on printing money more easily. There may arise stronger political pressure to expand the money supply without limit. This may lead to uncontrollablyunstable inflation. Inflation also implies drastic income transfer from bond holders to debt holders, which may not be justifiable from an income distribution viewpoint. There are many reasons, including the ones mentioned above, for being skeptical regarding the use of monetary policy for generating inflation. Crucial question is whether there is some alternative policy other than inflation policy for escaping from a liquidity trap. Our analysis in Section 2 illustrates the point that it depends on what factor is causing the liquidity trap. If it is necessary to utilize monetary policy for generating inflation expectation, we then need some explicit monetary policy rules, which are strong enough to escape from liquidity traps but at the same time are effective enough to suppress unnecessary political pressure and to keep the independence of the central bank. Inflation targeting, under which not only an upper bound but also a lower bound of the inflation rate is set, is a candidate for such a rule. Some other rules, such as money supply targeting, or base money targeting are also candidates.