BUSINESSWEEK ONLINE : JUNE 12, 2000 ISSUE
INTERNATIONAL -- ASIAN COVER STORY A Talk with the Taskmaster (int'l edition) Bank of Japan Bank of Japan Governor Masaru Hayami has many critics. He is locked in a policy war with the ruling Liberal Democratic Party over the direction of interest rates and the yen, and everything he says is scrutinized in capitals around the world. Hayami wants to raise Japanese rates, which critics charge might stunt Japan's fragile recovery and roil global markets. In an interview with Asian Economics Editor Brian Bremner, Hayami offered his perspective on monetary policy, reform, and religion. Note: This is an extended, online-only version of the interview that appears in the international editions of Business Week's June 12, 2000, issue. Q: The Bank of Japan seems relatively upbeat about the economic recovery. How come? A: What I see as good news in the economy is the ongoing structural restructuring in the private sector. We are seeing a creative destruction movement, in which corporations have been getting rid of old equipment and making new investments and promoting innovation in their activities. It is this restructuring and reengineering movement in the corporate sector, including the spread of information technology, that I see as a bright sign. Also, in the labor market, we are seeing an improvement in the income environment. This will have a good impact on households. But we are still not sure whether this will translate into more private consumption. Q: You say Japan's current zero-interest-rate policy is "abnormal" and should be dropped. Why? A: When we started this zero-interest-rate policy in February of last year, the economy was in a crisis-like situation. There was the risk of a deflationary spiral in the economy as well as instability in the financial system. In that context, the government decided to provide public funds to strengthen the banks' capital. We also started this zero-interest-rate policy as kind of an emergency measure to cope with this crisis-like situation. But since the beginning of this year, we have seen evidence of a self-sustaining recovery in the private-sector demand. More concretely, capital expenditures by the corporate sector have started to improve. As a result, production activities have continued to increase, while price stability has been maintained. Looking at the labor markets, we still see large unemployment. But we are also seeing increasing demand for labor resources, and the declining trend of wages has stopped. As such, we are seeing signs of a self-sustainable recovery in the private sector. What has left us still wondering is the direction consumer spending will take. Q: If Japan's ultra-loose interest rate policy is working and there is no sign of inflation, why even talk about a shift? A: Under this unusual situation, it could cause too much comfort to the private sector, create a moral hazard, and go against the promotion of competition in the markets. If restructuring efforts of the private sector are postponed because of this kind of moral hazard, it will not contribute to the overall economic recovery. If you look at the household savings in Japan, it's very significant, about $12 trillion, or 2.6 times our gross domestic product. Of that savings pool, about 70% is held in the form of deposits by financial institutions. Those deposit holders mostly come from a relatively old generation. They have more concern about the future because they can't expect much interest rate income from their deposits, despite the fact that their principal won't be harmed. I think the zero-interest-rate policy was an unusual measure to cope with crisis in Japan. To push the economy forward, we have to correct this unusual situation. Under the new Bank of Japan law of 1998, we were given independence with respect to monetary policy and also to stress the importance of transparency and accountability. There are two important tasks ahead of us. We need to make the right decision at the right time with respect to monetary policy. And we need to clearly explain what we are doing right now and what we will do in the future. Q: Do you think the Bank of Japan Policy Board is ready to make the change sooner rather than later? A: It is hard to tell the exact timing. We still have to monitor the situation. Q: You ran the trading company Nissho Iwai Corp. during the bubble years when cheap credit triggered overinvestment. Has this shaped your thinking as a central banker? A: I joined the trading company and worked there for 10 years as chief executive and chairman. Through that experience, I was on the borrower's side of the economy. During that time, we tried out many new things, particularly because of the low interest rate environment. Some of them were successful, and some were not. But what I learned from the experience was the importance of moving forward by taking risks. Q: You have been severally criticized for not doing enough on the monetary side to secure the recovery. Do you think it's unfair? A: I recall the statement of a former Bundesbank president, who said, "One who serves as the central banker should have the courage to endure unpopularity." While there have been times that our policy has had a bad reputation, it was eventually understood by the public. It's very natural for corporate borrowers, as well as the government, to favor lower interest rates. Alan Greenspan once told me that being the guardian of the integrity of money is an important responsibility and a very important challenge. I think we should be proud of the criticism. Q: At last September's Group of Seven Finance Ministers meeting, the U.S. thought Japan would take steps to halt the yen's appreciation and to expand Japan's money supply. But the BOJ angered Washington by doing nothing. What happened? A: At that time, the U.S. economy was in a sound situation, and Washington wanted Japanese authorities to ease monetary policy and promote a recovery as soon as possible. I believe they hoped that investment into the U.S. would also increase. We understood their way of thinking. There was an argument about just how to increase liquidity on the monetary side, though we both shared concern about too much strengthening of the yen. That kind of thinking was reflected in the communiqué and we also discussed that during the meeting. Though I thought the significant fluctuation of the yen wasn't desirable, I didn't feel uncomfortable about the exchange rate back then. Q: You often talk publicly about your religious beliefs. Does a spiritual background come in handy in your job? A: I believe the central bank is the conscience of the country. I have been a Protestant Christian since my student days. Every week I go to church, and although I'm still a sinful person, whenever I get a chance I do try to think about how I can realize God's calling as a central banker. I like to sing hymns, too. [Laughs] Q: You're 74 and have a very stressful job. How do you stay fit? A: I try to play a round of golf about once a month. But I'm lazy. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Inside the Bank of Japan (int'l edition) ASIAN COVER IMAGE: Inside the Bank of Japan CHART: Japan Has Cut Rates to Zero...Without Sparking Inflation...But Growth Remains Anemic A Talk with the Taskmaster (extended) (int'l edition) Commentary: Why Summers & Co. Have Stopped Bullying Japan (int'l edition) ONLINE ORIGINAL: "No...to a Stop-and-Go Policy" ONLINE ORIGINAL: "The Public Is Wiser Than the Economists or Government" ONLINE ORIGINAL: "We Called the Policy Board the Sleeping Board" INTERACT E-Mail to Business Week Online

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