Japan's Pols Pick a Scapegoat


By Brian Bremner As we march into 2001, with the global economy throwing off distress signals, it's no fun being a central banker. Federal Reserve Board Chairman Alan Greenspan has been taking a beating for moving too slowly to slash interest rates in a U.S. economy that's starting to look like a candidate for recession. Meanwhile, European Central Bank President Willem F. Duisenberg has been roughed up for failing to stem the slide of the euro, vs. the yen and the dollar -- not to mention his penchant for riling up the markets with loose talk about his central bank's monetary strategy.

But my heart really goes out to Bank of Japan's Masaru Hayami, who is calling the monetary shots in the world's most troubled industrialized economy. Just about every major economic indicator in Japan has been heading south of late, and the Nikkei is a pretty sick puppy. Worse, a decade-long spell of stagnation seems sure to spill over into 2001. Some analysts even think the economy may dip below the waterline into negative growth.

The ruling Liberal Democratic Party government of Prime Minister Yoshiro Mori clearly would like to see Hayami, 73, head to the golf links for an indefinite stay. They are clearly setting him up as the fall guy if the economy tumbles off a cliff during the first half of the year. Their view: The Bank of Japan raised interest rates in August for the first time in a decade and everything has gone wrong since then.

No question, as Japanese return from hot-spring resorts and other New Year's holiday festivities, they face a pretty grim economic outlook. The nation's economy will be lucky to expand 1% this year, the number of bankruptcies is at a record high, corporate restructuring is throwing people out of work and reducing wages, and much of the financial sector is still burdened with a mountain of bad debt.

RIGHT TIME, WRONG PROBLEM. But are the BOJ and Hayami really at fault? Here's the fair question to ask: Is there much, if anything, the central bank could do to alleviate the pain of a Japanese economy undergoing such a painful transition? On the interest-rate front, probably not much, it turns out. The rate hike last summer was all of 25 basis points on the so-called overnight call rate, similar to the federal funds rate in the U.S. that banks with excess reserves charge other lenders in need of short-term loans.

The rate had been pushed down to zero in early 1999 as an emergency measure to pump more liquidity into the financial system. Even so, Japan still has one of the lowest interest-rate regimes in the industrialized world. The official discount rate is all of 0.5%, and Japanese long-term bond yields are around 1.8%.

The problem at the moment isn't the price of money, but the demand for it. Companies burdened with a lot of debt are trying to slash costs and fix their balance sheets rather than investing in new plants and hiring more workers. There is still a lot of excess debt, labor, and capacity from the 1980s that hasn't been dealt with.

Of course, one reason is that the government has been spending like crazy, bringing forth $1 trillion-plus worth of public-works spending since the early 1990s to keep the economy afloat and bail out banks and small and midsize companies. With Japan's gross debt now roughly 140% of gross domestic product, the government can't afford to spend much more without creating a panic in the Japanese bond market or incurring the wrath of credit-rating agencies, which would slash the nation's sovereign debt rating.

UP TO THE CHALLENGE? What Mori and his gang really want aren't rate cuts, but for the Bank of Japan to take the radical move of underwriting and buying new government bonds so the government can spend some more. Hayami has repeatedly said no, arguing that Japan would lose what little fiscal discipline it has left. He continues to tell the Japanese public in speeches and interviews what Mori's gang won't say: There'll be no more quick fixes, folks. The structural adjustment the economy is now making "is an inescapable challenge if we are to return to sustainable economic growth," Hayami said in a speech on Dec. 22.

In other words, forget irresponsible fiscal measures or monetary gambits. The only way out is a lot of restructuring that, though painful, will secure Japan a better future. To the worrywarts, Hayami points out that both the U.S. and Britain made the same kind of transitions -- and so will Japan.

In the fullness of time, I think Hayami will be proved right. But when times are tough, central bankers are often convenient targets for politcos and pundits looking for scapegoats. At least Hayami can take some solace in the fact that he is not alone. With the global economy looking pretty punk in early 2001, this year won't be much fun for Duisenberg or Greenspan either. Bremner, Tokyo bureau chief for Business Week, offers his views every week for BW Online


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