BUSINESSWEEK ONLINE : JUNE 12, 2000 ISSUE
INTERNATIONAL -- ASIAN COVER STORY "The Public Is Wiser Than the Economists or Government" A Talk with the Bank of Japan Policy Board's Teizo Taya With the Bank of Japan now weighing whether to swing away from its ultra-loose monetary policy, the markets have been scrutinizing the statements of the bank's Policy Board, looking for hints about the timing of such a move. Newcomer Teizo Taya, who was appointed by the Japanese Parliament last December to fill the vacancy left by the retirement of Yasuo Gotoh, has received special scrutiny. As a private economist with Daiwa Research Institute, Taya once seemed to be in favor of unorthodox policies and dramatic monetary easing -- to target a modest dose of inflation to heat up the economy -- a radical move for any central bank. These days Taya doesn't think the economy is bad enough to warrant such risky gambits. But he's far more skeptical than Bank of Japan Governor Masaru Hayami that it's time to start raising interest rates now that the economy, though weak, isn't in a full-blown crisis. Here are edited excerpts of a recent interview with Asian Economics Editor Brian Bremner: Q: What's your take on the quality of Japan's economic recovery? A: I think all sorts of excesses have become smaller and smaller. For instance, financial institutions have disposed of bad loans to a large extent. I still think that Japanese banks probably need at least one, maybe two years, to deal with the bad-loan problem. Nonfinancial corporations have had the so-called three excesses of liability, labor, and capacity.... Japanese companies have reduced these excesses. We may need a few years more to go. In terms of structural issues, we still have problems. On the cyclical side, we [the BOJ policy board] agree that the economy has started to recover. Corporate investment, or business fixed investment, has started to recover. Also, exports have contributed to growth in a positive fashion, and the condition will likely continue. Corporate investments as well as exports are encouraging areas. Many people agree that public investment is not likely to continue to grow in a significant way unless the government provides a large-scale supplementary budget toward the end of the year. We still have a high degree of uncertainty in the face of the upcoming general election. Finance Minister Kiichi Miyazawa has indicated repeatedly that we aren't likely to need a large supplementary budget like last year. Many economists, including myself, think the extent to which fiscal policy can contribute to growth is likely to become smaller. This is discouraging. Housing investment isn't likely to contribute to growth. The Japanese government has employed measures to stimulate housing investment over and over. I don't think there is much pent-up demand.... We have been trying to judge whether private consumption will decline further.... Some statistics related to consumption aren't 100% reliable. So we are paying more attention to employment and income. Consumption is a key question at this point. Q: Japanese consumers still aren't spending on a big scale just yet. Why not? A: There is a significant difference between the current recovery phase [since the beginning of the 1990s] and the post-war experience. Whenever the economy entered a recession phase in the past, we observed a pickup in the propensity to consume. People were so [confident] about their income in the future. So whenever there were income declines due to a decline in production, [people] didn't take it as a permanent change.... They tended to spend more. We always observed a propensity to spending before the beginning of the 1990s. But since 1990 and 1991, we have observed no pick-up in the propensity to spend. I think, in a sense, the general public is wiser than economists or the government. They sensed that something was different from the past. They have taken a defensive stance. I think their collective decision proved to be correct. Often we underestimate the ability of the general public. This is a significant difference. Q: O.K., so there are some signs of improvement. But do you think it's wise to shift away from Japan's ultra-loose monetary policy just yet? A: I'm more cautious. We should keep the current policy until the time when we can make sure that a self-sustained recovery in private demand can be foreseen. To me, the important point is what we have committed to. I want to see a set of statistics that can explain the situation. It depends largely on a series of statistics, particularly in regards to consumption. Q: Do you agree with Hayami that keeping the free-money regime in place too long discourages restructuring? A: We have to go through a period of adjustment in which highly indebted corporations have to change. The zero interest rate policies may discourage those companies to not go through that kind of severe phase. That has been one side effect of the zero-rate policy. Up until now, the positive effects have outweighed the bad. Q: Some market watchers are worried that if Japan changes too abruptly it might send long-term bond rates and the yen soaring. A collapse in the dollar and outflow of capital from the U.S. is a frightful thought for the global economy. Are you worried? A: People are worried about the effects of changing the current policy at a premature stage. It seems to me that many people overemphasize the impact lifting the zero-rate policy would have on the U.S. market. The main channel through which the U.S. has imported foreign capital is from Europe. This is why the Euro has been weak. I don't think we should overemphasize the impact from changing our policy on the U.S. markets. This is my basic stance. Q: Two years ago, the Bank of Japan's charter was overhauled to give it more independence on monetary matters. Is the BOJ emerging as a real power on financial matters like the U.S. Federal Reserve? A: The U.S. Federal Reserve has already established a very high reputation in the market. We are still in the process of establishing [ours]. There is a slight difference from that perspective. As far as the institutional framework of decision-making, there is no difference. Our board consists of a group of independent members. People still have the perception that even under the new regime, not very much has changed. Actually, the BOJ has changed almost completely. In order to have this independence, we have committed to transparency to the market as well as to the Diet and general public. We have had tried to have better accountability. Our governor went to the Diet something like 100 times last year. Q: The BOJ has taken criticism from advocates about using inflation targets to heat up the economy and secure the recovery. Your thinking has changed somewhat. Why? A: We shouldn't be afraid of being criticized. We have to realize there will be criticism for not employing inflation targeting or not underwriting Japan government bonds. In the past we have discussed inflation targeting. Under certain circumstances we might have to resort to extreme policy measures. But what is the current situation? The economy has started to recover. So our discussion has centered on the timing of lifting this overnight call rate. Before I accepted this job, I was sometimes called an advocate of monetary easing. But if you think of the means by which you would try to increase the quantity of money, there is no certain way by which we can achieve it. For instance, people often talk about the increase in the outright purchase of Japanese government bonds. I think this policy is an option under certain extreme situations. Imagine a case in which we try to focus the rate of money supplies by underwriting bonds. One objective would be to bring down long-term interest rates. We may for a certain amount of time, but we don't know for how long. The market may react in a different way because of the implications for fiscal discipline, especially at a time when the rating agencies are considering a downgrade. Q: How do you get on with Hayami? A: I respect him very much. He has his own mind and own views. He is someone who can make a decision. I put forward my own views. Discussions are quite frank. We try to exhaust all sorts of possibilities. Our summaries of discussions are more detailed -- even compared to the U.S. Federal Reserve and the Bank of England. We are still in the process of establishing our credibility with the market. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 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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