Magazine

Commentary: A Job Only a Masochist Could Love


By Brian Bremner

To: Governor-elect, Bank of Japan

Re: Your job

cc: Prime Minister Koizumi

By the time this edition of BusinessWeek hits the newsstands, you will have been nominated by Prime Minister Junichiro Koizumi to replace Masaru Hayami as governor of the Bank of Japan. Let me be the first to wish that a divine wind guide you safely through your five-year term as central banker, for you have just signed on for a major role in one of the biggest economic-salvage jobs in the rich world.

That's the formal advice. Now here's the informal advice: Turn the job down. Get out now, while you're ahead. Snag one of those cushy gigs with the World Bank or the International Monetary Fund in Washington instead.

Fact is, Honorable Governor, you have signed on for an all-but-impossible job. Why? One reason is that Japan is now Deflation Nation. Both consumer and wholesale prices have been heading south since 1999, and the Mitsubishi Research Institute says the trend will last another five years. Japan hasn't experienced so many years of price declines since the 1930s. No postwar central banker has faced such a challenge.

And no one has a credible program to fix Japan's deflation, given the combination of historic and political forces. Historic? The growing import penetration from other Asian economies and the U.S., the global overcapacity in chips and computers, and the lack of pricing power among domestic Japanese companies have caused a structural shift in the economy. And the wave of cheap Chinese goods, which will further depress prices, is just starting. Political? Let's face it: The politicians of the ruling Liberal Democratic Party pushed the banks for too many years to prop up deadbeat borrowers, and now the bad-loan hole is too deep to dig out of -- especially considering the ferocious opposition Koizumi meets every time his lieutenants try to do something about it. And it's up to the government, not the BOJ, to sell off the bad loans and shut down the sick banks. You can only agitate for bank reform, keep the money markets flush, and shoot for price stability. Fixing the banks is a political job, and you're not a politician. So reforms will just inch forward. Unless something changes fast, scared banks will stop lending, business will contract further, and prices will drop some more.

Pretty depressing. But don't stop reading! We've got to warn you about a few other things. The independence of your central bank, for one. It's a fragile thing, won only in 1998. Should there be a blowup in the banking sector or a nasty collapse in prices, the LDP will play the blame game. Guess who'll get the blame? After that, it will be a short step to changing the bank's charter so the government has a veto over your decisions. Alan Greenspan wouldn't put up with that. Will you?

Even if the LDP doesn't mangle your charter, there will be relentless pressure on you to Do Something. Politicians pressed Hayami to risk the BOJ's credibility by buying all manner of assets -- even stocks and land -- to purposely generate inflation. Lucky for you, cooler heads prevailed. A go-for-broke inflationary policy would signal to the world that Japan has lost all fiscal discipline and perhaps trigger a bond-market crash.

Who's to say the policy czars won't press for a crazy reflation scheme again? Even if they don't, they'll push you to keep buying government paper -- not to bankroll real reform but to keep the rickety system of bank bailouts and make-work schemes going another week, another month, another year. Play your cards wrong, and you could go down as the central banker who presided over Japan's permanent slide into the deflation hole.

Still want the job? Be prepared to get on your high horse and preach banking and structural reform morning, noon, and night. That's what Hayami did. Sometimes he got the politicians to move a bit in the right direction. Come to think of it, if you have the stomach, you may provide the only credible opposition the politicians have. Good luck. Bremner covers Japanese finance from Tokyo.


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