BW Online | September 10, 2001 | Don't Bully the Bank of Japan

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SEPTEMBER 10, 2001

INTERNATIONAL -- EDITORIALS

Don't Bully the Bank of Japan

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Should central banks be free of government meddling? Economic orthodoxy says yes. Yet with Japan caught in a deflationary spiral, facing record high unemployment, and entering a nasty recession, the ruling Liberal Democratic Party of Prime Minister Junichiro Koizumi is flirting with the idea of hijacking control over monetary policy from the Bank of Japan. The BOJ, which only won its full independence in a new charter in 1998, could once again be a plaything of bureaucrats and the LDP.

With Japanese consumer and wholesale prices tumbling, Koizumi's Economy Minister Heizo Takenaka wants the BOJ to commit itself to increasing inflation to a 2.5% annual rate. And if the BOJ won't, he hints, the government might well pass legislation giving it the power to do so, and order BOJ Governor Masaru Hayami to play ball. The aim is to set off a bout of rising prices to get consumers spending again and melt away the debt pressures on indebted companies.

To central bankers used to fighting inflation, this is heresy. And given the economy, consumers won't run off to the local Toyota dealer because prices are rising. They will only spend when they see a full-fledged recovery underway. And that won't happen until a lot of excess capacity, labor, and debt is burned off the corporate landscape. Boosting inflation and letting poorly managed companies off the hook by lessening their debt in nominal terms won't accomplish that.

The BOJ argues that only sustained, albeit painful, restructuring can return Japan to health. It is already committed to getting prices rising at around 1% and providing ample liquidity to banks to prevent a reprise of the 1988 financial crisis. It should do everything possible on the monetary side to ease the pain of Koizumi's economic reforms. But forcing it to adopt radical and unproven policies at gunpoint would signal to the global markets that Japan has fallen back into an old syndrome. Koizumi would be wise to back off from this bad idea.

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