| Date | February 20, 2003, 14:00-17:00 | ||
| Panelists | Takatoshi Ito | Professor, Research Center for Advanced Science and Technology, University of Tokyo | (keynote speech) |
| Yasushi Okada | Chief Economist and Head of Economic Research, CSFB Securities, Tokyo Branch | ||
| Izuru Kato | Director and Chief Economist, the Totan Research Co., Ltd | (Keynote speech) | |
| Noriko Hama | Professor, School of Management, Doshisha University | ||
| Moderator | Shunichiro Ushijima | Vice president, Economic and Social Research Institute, Cabinet Office,
Government of Japan |
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| Language | Japanese only | ||
At the beginning of the discussion, Professor Ito and Mr. Kato delivered the keynote speeches (see the materials of the keynote speeches in our Japanese homepage). The panel discussion was then held, including questions from the audience and exchange of opinions.
(2) Anti-deflationary policy. A policy package that includes inflation targeting is indispensable. Specifically, it is necessary (1) to implement unconventional monetary policies such as an increase in purchase of government bonds and purchase of ETF, (2) to adopt an inflation targeting policy, (3) to shift government expenditures, without increasing the budget deficit, from projects having a low multiplier effect (roads, bridges, and others) to those with a high multiplier effect, (4) to combine a short-term tax cut (residential and capital investment) with a mid-term tax increase (including possibility of gradual increase in the consumption tax), and (5) to dispose the non-performing loans as soon as possible. These policies are complementary to one another. It is necessary to implement them simultaneously. Even if temporary interventions in the market are conducted as countermeasures to deflation, it will not inhibit the functioning of the market. It is the mission of the government to help the market, which does not function properly.
(3) Concrete inflation target. For example, it is necessary to announce that monetary policy will be conducted so as to encourage inflation toward one to three percent within two years, and to pursue the policy package. The commitments of both the Bank of Japan and the government are crucial. The target range of one to three percent is the actual figure that was attained during the period of 1982-1993, excluding a short period after the Plaza Accord. Relative prices may change as a result, but it does not mean that inflation targeting will entail undesirable changes in relative prices.
(4) Necessity of inflation targeting. Inflation targeting is necessary because (1) it influences expectations (it lowers the real interest rate and strengthens the effect of monetary policy. Moreover, creating a ceiling will eliminate concerns about hyperinflation), (2) the shared target of the Bank of Japan and the government will allow them to coordinate their actions while maintaining an appropriate distance, (3) the accountability of the Bank of Japan will be enhanced and, therefore, communications with the market will become easier. Inflation targeting in case of inflation and anti-deflationary targeting are basically the same. However, since the initial conditions are different, the means are different. In addition, we need not fear that the nominal interest rate will rise before the real interest rate declines under the present weak economic situation.
(5) Purchase of ETF. In an environment in which the lending function of the banks does not work properly, ETF is expected as a new financial channel for those who sold stocks to spend more for consumption and investment with the cash received from the Bank of Japan in exchange for the stocks. There is no need to continue to hold ETF permanently: when general prices rise, it is possible to sell them. To maintain independence from the government, it is preferable for the Bank of Japan to buy ETF directly rather than to finance the government, who buys ETF, through the purchase of government bonds.
(6) Exchange rate: The appropriate anti-deflationary policy will entail a depreciation of yen, which should be left as it is. This depreciation is likely to give rise to criticism, but that can be ignored. However, a policy that attempts to encourage a depreciation of yen only by intervention would be inappropriate, since it could contribute to confusion in the foreign bond markets.
(7) If an effective policy is not undertaken. Under the present situation, if we do not implement the above-mentioned policy package, the deflationary spiral will continue and we will never be able to overcome it. In addition, public finance will fall into bankruptcy. If we had launched the policy package including inflation targeting two years ago, the present situation would have been less painful.
(8) The prewar Takahashi fiscal policy. At that time Japan could receive the benefits of yen devaluation, and budget deficit problems like we see today did not exist. These points greatly differ from the present situation.
(2) Concrete inflation target: Inflation on consumer prices should be set in the range of two to four percent. To implement that strategy, collateral commitment is necessary. Implementing an easy monetary policy while saying that it is not effective is a kind of commitment to deflation. Two years ago, the Bank of Japan raised interest rates, contrary to the world trend and domestic voices of objection. To prevent such an action in the future, monetary policy should be bound by law. An inflation targeting policy does not exert a negative effect on relative prices. It is deflation that restrains the original changes in relative prices and hampers the normal functioning of the market.
(3) Means of inflation targeting: I propose that the Bank of Japan buy, unconditionally, issued government bonds worth about 600 trillion yen until the inflation target is reached. If the price level does not rise and the demand does not increase, it is possible to buy up the total amount of 600 trillion yen. At present, the Bank of Japan buys 1.2 trillion yen worth of government bonds every month. This amount should be increased to 5 trillion yen. To buy up the government bonds means that the interest income of the Bank of Japan will return to the government and, thus, the interest burden of the government will be alleviated. Furthermore, the refinancing, if continued, would become virtually equivalent to a write-off.
(4) Necessity of inflation. Cash balance at the end of last year reached an all-time high of 70 trillion yen. This is due to the strong deflationary expectations. If the deflationary expectations disappear, the holding of low risk-low return assets such as cash will be unprofitable and it is expected to shift to the risky assets on a massive scale.
(5) About anti-deflationary fiscal policy: In Japan, an increase in GDP by one percent leads to a decrease in unemployment by only 0.1-0.2 percent. Consequently, to reduce unemployment from the present level of 5.5 percent to three percent, more than 63 trillion yen worth of public spending will be necessary. Continuing this expenditure for three years would bring public finance to bankruptcy. For this reason, it is impossible to expect fiscal policy to curb deflation.
(6) If an effective policy is not undertaken.If the situation of nominal interest rates exceeding nominal growth continues for five more years, public finance will go bankrupt and hyperinflation will emerge.
(7) The prewar Takahashi fiscal policy. Seventy years ago, when Takahashi was the Minister of Finance, the same criticisms against the anti-deflationary policy existed then, but they proved to be mistaken. After the Great Depression, there was no increase in bank lending in both Japan and the United States, but deflation was overcome. In addition, economic recovery was not due to the adjustment function by interest rate fluctuation that would be possible when interest rates were not zero. In fact, interest rates on loans on deeds did not decline by even one percent in the period 1932 - February 26th Incident (attempted coup d'etat) in 1936.
(2) Problems of short-term money market. The short-term money market ceased to function properly under the policy of zero interest rates. Despite the huge deposits, worth some 20 trillion yen on the current account in the Bank of Japan, liquidity is deteriorating. Moreover, there are cases when the funds provided by the buying operations of government bonds do not flow to the call market. The revitalization of the financial market is indispensable.
(3) Monetary easing and anti-deflationary policy. The Bank of Japan has taken a sufficiently easy monetary policy, but the effect of the sole unconventional policy is transient. So long as there is a deflationary gap, it is necessary to continue the stimulation policy. I do not deny the authorities' temporary intervention in the market. Nevertheless, the market is a mirror of the real economy, and it is necessary to realize that the policy distorting the mirror (controlling the market) will invite a rebound. It is, rather, an intensive fiscal stimulus that will focus on a specific purpose, such as to dispose of the non-performing loans, that can be accepted by the market and that can be financed temporarily by the Bank of Japan.
(4) Problems with inflation targeting policy: In an environment in which the liquidity trap has been deep-rooted due to zero interest rates, even if we increase the amount of buying operations of government bonds or implement a purchase of ETF, we cannot hope for the monetary easing effect through the expansion of the deposits on the current account in the Bank of Japan. Furthermore, the contraction of household consumption is due to anxiety about the future, including the pension problem, not to deflation. Thus, inflation would not entail an increase in demand and wages.
(5) Problems with purchase of ETF: Even if the Bank of Japan buys ETF, the effect on prices will be small. If the purpose is to raise asset prices, there are such problems as (1) whether it would be possible to maintain stock prices that deviate from profits in the long term, (2) probably we would be hard-pressed to implement measures to bolster stock market prices in every accounting term, (3) the payment would be "helicopter money" and lower the economic moral of the nation (it should be counted on the government accounts that need to be approved by the Diet), (4) ETF is not redeemed, and it would be difficult to sell in reality. As a result, the Bank of Japan would become the biggest player in the stock market and there is a possibility that the stock market will die like the present short-term money market.
(6) Problems with policy inducing yen depreciation through the buying operations of foreign bonds. It is difficult to implement this policy on a large-scale. Moreover, it would create problems with monetary and credit control by the Federal Reserve Bank of NY. A direct yen-selling intervention in the foreign exchange market is better.
(7) How many years will it take to emerge from deflation? The Japanese economy will not be able to overcome deflation in 10 years, taking into account the decrease in population and the global deflationary trend. During that time, an approach that will not cause the bankruptcy of public finance is essential, and we should build new business models to respond to deflation.
(8) The prewar Takahashi fiscal policy. The fiscal policy by Finance Minister Takahashi was a package of expansion of government spending, cuts in interest rates, and yen depreciation. At that time, the Bank of Japan underwrote the government bonds, sold them immediately in the market, and absorbed the massive excess of funds. Back then, short-term interest rates were not zero; the market was functioning (there was a room for a decline in the interest rate). The Takahashi Fiscal Policy created a safety net-the System of Standard Prices of the Government Bonds-in preparation for rise of long-term interest rates. This is also necessary today, as a reflation policy without careful preparations could cause a haphazard expansion of public spending. Moreover, in that period a dynamic shift of industrial structure from light manufacturing industries to heavy manufacturing industries and from local districts to Tokyo, was proceeding. At present, adoption of the same policy is unfeasible because of the huge government debt. Nevertheless, it is necessary to reconsider the use of government funds and to promote the development of industries that have international competitiveness.
(2) Anti-deflationary policy. As too heavy burden has been placed on the monetary policy till now, it is necessary to return to the conventional policy such as increasing public spending. As long as the problem is lack of demand, there is no other way but to hope on the increase of public spending. Nonetheless, the situation in public finance is extremely severe and a big risk is involved in the increase of public spending. In implementing this policy, taking into account the risk, it is necessary to restrict a period and to ensure transparency with accountability of the government. Furthermore, it is important to relieve the monetary policy from the abnormal situation, to revitalize the function of the market, and to return to the sound policy mix.
(3) Relationship between public spending and unemployment Rate. The results of the estimates on the amount of public spending necessary to lower unemployment to a certain level depend on the method used.
(4) Problems with inflation targeting policy. Adoption of an inflation targeting policy means a denial of market vitality. Nevertheless, because the market is alive, even if we set up an upper bound ,it is quite difficult that inflation, once it happens, will settle down within a proscribed range. I do not think that expectations will turn out to be inflationary. Even assuming that expectations do become inflationary, demand will not arise as long as structural problems and unemployment are the causes of the lack of demand. Besides, since Japan is goods-abundant, rising prices are unlikely to stimulate demand. Fluctuation of the prices is a result, and making it a target is a mistake.
(5) Problems with purchase of ETF. Even if households get cash as a result of the buying operations of ETF by the government or the Bank of Japan, this cash is likely to be kept under the mattresses, so the effect is doubtful.
(6) How many years will it take to emerge from deflation? This depends on the consequence of the structural reforms. Judging from the experience of the structural reforms in the United States, the United Kingdom, the Netherlands, and other countries, it takes about 10 years before you can see the results. Because the situation in Japan is particularly severe, it will probably take 10-15 more years after "the lost decade."