A New Age for Bankers - From Inflation Control to Inflation Creation
Visiting Fellow, RIETI
Back in Tokyo for the first time for several months. Everybody tells me I must go see the wonders of Roppongi Hills. The thoroughness and imagination of the area design, the quality of the architecture, the glittering malls with their designer goods boutiques are indeed impressive, a testimony to the wealth of a rich nation.
The next day I read in the newspaper an account of a reporter's visit to Hitachi City. The headline: "A provincial economy's bitter struggles". He describes the sad spectacle of the town's central Ginza Mall. Nearly half of what once were 75 shops are closed and shuttered. The big chains like Macdonalds have fled.
The gap between those who prosper and those who suffer under Japan's deflation grows by the day. Deflation itself inflicts none of Mr. Koizumi's famous "pain" on employees on fixed incomes (including politicians and bureaucrats). What could be better than having things get two percent cheaper year by year?
But if the economy is growing at zero percent, because deflation holds back consumption and investment, and depresses risk-taking entrepreneurship and "animal spirited" optimism, it necessarily follows that those people's gain in real income is matched by a loss of income on the part of those who become unemployed, or whose income depends directly on their sales or commissions.
The members of the Bank of Japan's Monetary Policy Committee take turns to go regularly for "economic roundtables" in provincial cities - an admirable example of "dialogue politics". Such an occasion took Haru Hidehiko (former vice-president of Tokyo Electric) to Iwate, where, it seems, he was somewhat taken aback by the tales of economic hardship he heard. As he said at his press conference, "compared with one's normal perception of how the economy as a whole is going, the people in Iwate seem to feel they're having a tough time." Nevertheless, he reported, only one person accused the BoJ of standing by while deflation ruined the economy and thought it should both set an inflation target and act to create inflation expectations. More people seemed to think that maintaining confidence in the yen was more important.
Mortal fear of inflation clearly is not confined to the Ministry of Finance and the Bank of Japan.
All the same, compared with last autumn when I was most recently in Japan, the inflation debate seems to have made some progress. The softer words mokuhyogaku(target value) and sanshogaku (reference value) have been newly mobilised to soften the crudity of taagetto. More concrete plans are being discussed and it is said that within the government and within the Monetary Policy Committee the idea of engineering inflation has more supporters.
One factor which should influence the internal debate - given the Japanese sensitivity to international opinion - is the nature and the tone of the decisions taken ten days ago by the European Central Bank and the Federal Reserve Bank - in both cases decisions dominated by the fear of deflation. As the Financial Times said on 14 May, "Last week marked a watershed in the history of post-war central banking. For thirty years the preoccupation has been with holding down inflation. Now the aim is to maintain it at a decent level."
But for creating the inflation expectations which might do the economy-stimulating trick in Japan, the real question is not whether you set an inflation target of 2 or 3 percent. It is what else you do simultaneously to make the expectation that you will reach the target realistic.
One suggestion. The principle that budgetary deficits have to be covered by borrowing - issuing government bonds - is one of the basic iron rules of public finance. But why not break it? Increase the government deficit by a carefully calculated amount and just get the Bank of Japan to print money to fill the gap - a device sometimes known as "helicopter money", but seriously advocated by more than one British economist. The logic is clear. The costs and benefits of such a policy - the inflation tax on savings, the relief to borrowers, and the advantage to almost everybody if the result is a spurt in growth - should be sorted out amongst the present generation who got themselves into the mess. There is no reason to expect future generations to foot the bill. That sounds pretty reasonable to me.
* Reprinted from Tokyo Shimbun, May 18, 2003
May 18, 2003 Tokyo Shimbun
May 26, 2003
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