اقتصاد ژاپن و سیاست های پولی: یک ارزشیابی عملگرایانه

Based on 30 years of experience, I try to explain why the Bank of Japan was more pessimistic in October 2001 as compared to April 2001. This change should be attributed to a slow down in the overseas economy and the price pressure it brings on Japanese economy. In response the Bank changed the main operating target from overnight call rates to the outstanding balance of current accounts. It committed to this policy till prices stopped deflating. This, it was hoped, would discourage banks from holding excess liquidity, but such a change has not occurred. The Bank committed to increase its purchase of long-term government bonds. With the decline in the role of banks in financial intermediation, financial markets become more important, but the stock prices are not responding to monetary relaxation.

In its October 2001 monthly economic report, the Bank of Japan expressed the following view on economic and financial developments: “Adjustments in economic activity are becoming more severe as the substantial decline in production negatively impacts employment and income conditions. In addition, the terrorist attacks in the US have further heightened uncertainty.” A detailed examination of final demand will help readers understand why such a gloomy picture was painted at that time: net exports were still declining not only due to a slowdown in overseas economies but also sluggish demand for information-technology (IT)-related goods; business fixed investment was also decreasing noticeably, particularly in manufacturing; future demand for the IT-related sector had been revised downward; housing investment remained sluggish; public investment was declining (e.g. the value of public works contracts had been at a low level since the start of fiscal 2001); and private consumption remained almost flat on the whole, with somewhat weaker indicators being increasingly observed. Reflecting these developments with respect to both domestic and external demand, industrial production continued to decline considerably. Although the increase in inventory was beginning to peak due to the decrease in production, inventory remained excessive in many areas, especially in those related to electronic parts and materials. Moreover, as speculation had become more widespread that a further deceleration in overseas economies was inevitable due to the terrorist attacks in the US, the business outlook of Japanese exporters became more cautious. As far as the export outlook was concerned, the prevailing view in October 2001 was that the environment surrounding external demand would turn favorable by around spring 2002. However, there was the risk that the terrorist attacks might prolong the downturn in US consumption, which would induce another round of adjustment in the Japanese economy. Meanwhile, with respect to the outlook for domestic demand it was anticipated that business fixed investment would follow a downward trend in view of not only the continuing decline in corporate profits but also the successive downward revision of investment plans in IT-related sectors. It was expected that private consumption would weaken gradually reflecting deteriorating employment and income conditions. Thus, a vicious circle where low corporate profits led to lower employment and income, in turn leading to lower corporate profits, was observed. In April 2001, the Bank of Japan had published a rather gloomy semi-annual economic outlook and risk assessment, but as described above, the Bank’s view on the Japanese economy in October was even gloomier. What were the factors behind this change in perception from April to October? Let me begin with the baseline scenario of the Bank’s view in April. First of all, in the first half of fiscal 2001, the economy was deemed to likely remain sluggish as a result of a decline in exports and production against the background of a global slowdown. Second, with respect to the latter half of fiscal 2001, it was thought that the recovery of the US economy would lessen downward pressure on Japan’s economy. Third, it would take time for the economy to show a clear sign of recovery because of persistent pressures arising from various structural problems. Fourth, it seemed likely that the output gap would continue widening and prices would remain weak throughout fiscal 2001. At the same time, the Bank identified four major risks: (i) developments in overseas economies, especially in the US, and in IT-related industries; (ii) developments in the financial markets at home and abroad, especially stock prices; (iii) the effect of structural adjustment, including the disposal of non-performing loans; and (iv) uncertainties among the public with respect to future prospects. Indeed, in the 6 months up to October 2001, the first two risks did in fact materialize. Overseas economies slowed down much faster than expected, which led to a sharp decline in exports and production. Against the background of a deterioration in corporate profits, business fixed investment also began to decrease. Such a development in the corporate sector adversely affected household income through lower employment and wages. Consumption had been holding up relatively well, but started to show weakness. In the financial markets, asset prices declined. In particular, a fall in stock prices had not only hurt business and household sentiment but also weakened the risk-taking ability of financial institutions. Under these circumstances, prices continued to decline. It should be noted that supply-side factors are important in explaining the current price decline in Japan—as global competition intensifies, firms are increasingly utilizing low-cost imports. Supply-side factors also include the rationalization of distribution systems and the effects of deregulation. However, the development of prices in 2001 appeared to be affected equally or even more by weak demand rather than supply-side factors.

In this section, I would like to discuss some of the points of contention and criticisms regarding the Bank of Japan’s monetary policy. The first issue concerns the so-called liquidity trap. Some argue that Japan’s economy is already in a liquidity trap and monetary policy is ineffective. As I described above, the Bank of Japan has been providing ample liquidity to the market and guiding short-term interest rates to virtually zero percent. However, such action alone has not been able to revitalize economic activity. Keynes presented the theoretical concept of a liquidity trap to point out the possibility that the effectiveness of monetary policy might be hampered. To be sure, the current situation of Japan’s economy is close to a liquidity trap. But, even if it is so, the central bank, as a policy maker, cannot remain a bystander when the economy is anticipated to deteriorate further. Under such circumstances, it should try any monetary policy measure as long as some effects are thought to exist theoretically, and avoid the risk of being caught up in dogmatic views regarding the effect and limit of conventional monetary policy. The second issue concerns inflation targeting. Inflation targeting or price level targeting has frequently been discussed recently. Can it be a prescription for the current problem confronting Japan’s economy? Originally, inflation targeting was introduced as a framework to improve the transparency of monetary policy. But inflation targeting is not the only way to improve transparency, rather ways to enhance transparency should be judged according to the situation inherent in each country. Prices are an important economic indicator, and price stability is a policy objective for many central banks including the Bank of Japan, though it is difficult to measure price stability solely based on the development of a single price index. Having said that, the benefit of inflation targeting cannot be completely denied. The main reason that the Bank of Japan thinks it inappropriate to adopt inflation targeting in the current economic and financial situation is that monetary policy alone cannot prevent a price decline. As has already been described, even after exhausting conventional policy measures, the Bank has been engaged in monetary easing by increasing the balance of current accounts as well as making use of the commitment effect. Despite these efforts, economic activity has not been stimulated and prices have not stopped declining. Thus, we need to bring the economy back to a sustainable growth path. Then, the adoption of inflation targeting will become one of the issues to be examined. The third issue concerns structural reform. The Japanese government has been promoting structural reform, which the Bank strongly supports. It is essential to resolve structural problems facing Japanese industry and the financial system in order to allow potentially powerful monetary easing to have its fullest impact on the real economy. Some critics have voiced concerns that if various structural reforms are implemented simultaneously, there will be a substantial deflationary impact on the economy in the short run, thereby widening the output gap. Such concerns are understandable. Indeed, the experience of structural reform overseas seems to indicate the existence of a deflationary impact in the short run. Furthermore, Japan’s economy can expect to receive little additional dividend from structural reform such as a substantial decline in long-term interest rates accompanying fiscal consolidation since there is hardly any room left for a further decline in interest rates. It is true that the bond market is not the only market that receives a dividend from structural reform. Indeed, it is possible that if the stock market favorably evaluates efforts toward structural reform, higher stock prices would have a positive effect on the economy. Moreover, in the case of Japan, the delay in effecting structural reform has made the problem of weak demand all the more serious. For example, private consumption has been very slow to increase. Of course, various factors are behind such development, but uncertainty with respect to the future pension and tax burden is one of the most crucial factors in view of the rapidly aging population. One way to stimulate private consumption is to reduce such uncertainty to the extent possible. In this regard, it is essential to overhaul the social security system including the pension fund scheme. Another way to stimulate private consumption, though perhaps a roundabout way, is to change the content of fiscal expenditure. Once it becomes clear that fiscal expenditure will be shifted from less efficient to more efficient objectives, the resultant prospect of an increase in the future value of wealth will likely have a favorable effect on the economy. Finally, I would like to reiterate my strong belief that the current monetary policy of the Bank of Japan will make a significant contribution to structural reform led by the government as well as to the improvement of Japan’s economy. ☆ Remarks originally made at the Japan–US Forum, New York University, New York, on 7 November 2001, and revised for readers’ convenience. Views expressed here are those of the author and do not reflect those of the Bank of Japan.