BUSINESSWEEK ONLINE : JUNE 12, 2000 ISSUE
INTERNATIONAL -- ASIAN COVER STORY "No...to a Stop-and-Go Policy" A talk with Bank of Japan's Yutaka Yamaguchi A 30-year-plus monetary pro at the Bank of Japan, Deputy Governor Yutaka Yamaguchi is one of the leading financial minds in Japan. A top-flight intellect, Yamaguchi thinks Japan ultimately needs to move away from its current ultra-loose monetary policy. But he's a little less gung-ho than the central bank's hawkish-leaning Governor Masaru Hayami. Yamaguchi also led an in-house review of the central bank's performance during the late-1980s bubble era. (On May 31, the BOJ posted two studies on the bubble years). The central bank admitted for the first time that it made some critical miscalls but also faced enormous political pressure from the Japanese and U.S. governments to keep Japanese interest rates low to support the dollar at the time. Yamaguchi recently discussed that issue and the current economic outlook with Asia Economics Editor Brian Bremner. Here are edited excerpts of their conversation: Q: What's your assessment of the economy? A: We have consistently said that we'll maintain the zero-rate policy until the deflationary concerns are behind us. We have gradually narrowed our focus on two aspects. One is that so long as the major price indexes trend downward, then that would have to [be] read as a sign of deflationary concern. Another aspect is the development of private spending. By that I mean business spending on capital and household spending. As I understand the situation, prices have become relatively stable. The wholesale price index in the last month was up half a percentage point from 12 months ago. The consumer price index, for reasons we don't exactly know, is still recording fractionally negative numbers. But given the fairly rapid recovery in industrial production and some early signs of private business spending, I think it's reasonably safe to read the CPI numbers as not an indication of further softening of demand. Rather [they're] due to other factors, including the streamlining of distribution and pressure coming from [imports]. That's the lag effect of the yen's appreciation. Private spending, based on our surveys, is improving rather markedly. It's the household sector that is still stagnating. But even here, we have seen some early signs that labor-market conditions are finally bottoming out. So I'm eagerly awaiting signs that the improvement in the business sector -- earnings and business investment -- is translating into a movement in the labor market and household sector. Q: Is it time to pull the trigger and raise rates? A: I would like to avoid a premature action. When we leave the zero rate behind us, we would probably resort to a minimum amount of change, like Mr. Greenspan has before in the U.S. Q: But if the outlook is uncertain and there is scant inflationary pressure, why even consider such a move? A: There is an argument that the so-called structural adjustment could have been delayed by very easy financial market conditions. There might be some truth to that. I place greater emphasis on the desirable relationship between interest rates and prospective economic growth. When Japanese economic growth was in the negative zone, or hovering around zero, I think there was no real background for our interest rates to go above zero. Things are gradually beginning to change. It now pretty safe to assume this economy will record positive growth, somewhat above the 1% growth projected by the government. It's true that at the present we don't see any signs of inflationary pressure. But as the economy improves, I think it's reasonable to leave behind the extremely easy monetary policy and gradually adjust our policy to the medium-term prospect of anticipated growth. That's what we failed to do in the late 1980s. Q: Speaking of the bubble years, what lessons has the BOJ learned? A: It's awfully difficult to construct [the] right policy when asset prices are fluctuating widely. I confess that we still don't have an appropriate way to factor asset-price fluctuations into monetary policy. I suspect that my colleagues at other central banks are facing similar problems. During the so-called bubble years, the economy grew very rapidly. The average growth rate from 1987 to 1990 was as much as 5% and probably exceeded the medium-term potential growth. In retrospect, it was perhaps desirable to raise interest rates in 1987 or 1988. We didn't. One reason is that the rate of inflation was pretty close to zero. Q: Wasn't there also a lot of pressure on the BOJ from the Japanese and U.S. governments to keep rates and the yen low to support the dollar after the Plaza Accord? A: I think the pressure was evident in two statements issued jointly by the U.S. and Japanese governments at the time. Q: A lot of economists, including Paul Krugman and former BOJ economist Mitsuhiro Fukao, still say the only way to secure a lasting recovery is to generate some inflation to heat up the economy. That's pretty unorthodox. What do you think? A: I want to say -- strongly -- "no" to that kind of argument. It might be possible to generate 1.5% inflation rate over time if the Bank of Japan single-mindedly decided to pursue that kind of policy. We would set an inflation target, and we would mobilize whatever policy options we had, possibly in assistance with the government. It would have to agree to spend more and the Bank of Japan would absorb what extra government debt it would agree to issue. In due course, there might develop a change in inflationary psychology among our people and gradually gain momentum. But there would probably be a relatively long lag. For a period of time, we'd have to commit ourselves to this, including operations at the long end of the market and actions by the government in the exchange market. But suppose we saw a build-up of inflationary momentum. Then, I think, it would probably be quite certain that the momentum would start to exceed the target. We would have to stop it. This type of argument, translated into the real world of monetary policy, would be the equivalent of a stop-and-go policy. We would destabilize the economy and the financial markets and further weaken the financial system. So I don't see any constructive elements. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 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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