Bank of Japan Gov. Haruhiko Kuroda's second term will start soon. The central bank's basic theme of monetary easing will be maintained under two new deputy governors -- reflationist Masazumi Wakatabe, a former professor at Waseda University, and Masayoshi Amamiya, a former BOJ executive director who supported Kuroda in his first term. And yet, the ultraeasy monetary policy over the past five years has also begun to produce a number of side effects. Three experts spoke about what those five years have brought to Japan's society and where we are headed, in interviews with The Yomiuri Shimbun. The following are excerpts from the interviews.
(From The Yomiuri Shimbun, March 23, 2018)
===
BOJ's independence to be put to the test
Ryunoshin Kamikawa / Osaka University Associate Professor
Following Gov. Kuroda's assumption of office, decisive quantitative monetary easing resulted in a weak yen, stock prices rose and the economy improved. However, economic recovery abroad also likely played a significant role.
The global economic downturn following the 2008 economic crisis caused by the collapse of U.S. trust bank Lehman Brothers occurred during the term of the previous BOJ governor, Masaaki Shirakawa. Even if Japan implemented monetary easing, additional easing by the United States was expected to result in a strong yen. Therefore, it is always necessary to come up with secondary and tertiary plans. This thinking gave the impression of a reluctance to set forth necessary policy measures.
Kuroda rejected such measures that were carried out only bit by bit. He also boldly introduced negative interest rates.
With the enforcement of the revised Bank of Japan Law in 1998, the independence of the Bank of Japan from the government was assured. This was motivated by reflecting on the demands for monetary easing from the government in the late 1980s, which brought on the bubble. Guaranteeing the independence of central banks was also an international trend.
The independence of a central bank means that it is put in the hands of experts so that politicians cannot meddle in monetary policy. When the economy overheats, the experts tighten credit as appropriate, thereby forestalling inflation. The argument for independence is founded on the reasoning that this stabilizes the economy as a result, and also benefits politicians.
However, when deflation occurs, circumstances arise in which this reasoning no longer holds true. This is because there is the possibility that the politicians demanding monetary easing may be right. Consequently, it is normal during a deflationary period for the government and central bank to cooperate to a certain extent.
Reflationists who emphasize monetary easing say that while the BOJ is independent in terms of the "methods" of monetary policy, they are not independent in terms of "goals." Goals such as inflation targets are to be decided by the government alone. This might be described as the approach taken in British-style politics, in which authority is concentrated in the cabinet. Moreover, in Britain, a framework has been established that holds agency chiefs accountable for achieving the performance targets agreed upon with ministers, and in this sense the Japanese system is similar as well.
Over the past five years, the Bank of Japan has played a part in driving the expansion of government spending as a result of purchasing large amounts of government bonds. Following his reappointment, Kuroda will be in a difficult position regardless of whether he is capable of meeting the 2 percent inflation target or not.
If prices rise, it will be necessary to raise interest rates as well. However, according to Finance Ministry estimates, if interest rates rise one percentage point in fiscal 2020, debt-servicing costs would increase by 3.6 trillion yen, while a two percentage point rise would result in a 7.3 trillion yen increase. For this reason, economists critical of monetary easing take a dim view of raising interest rates, believing that the government will pressure the BOJ not to raise interest rates.
Will they be able to carry out the appropriate tightening when the economy overheats and the signs of a bubble become evident? That is when the true worth of the BOJ's independence will be tested. While it will likely be difficult to sort out, it must be done before the side effects grow, without clinging to a 2 percent inflation target. If it works out, Kuroda will go down in history as the BOJ governor who successfully escaped deflation.
-- This interview was conducted by Yomiuri Shimbun Senior Writer Haruki Sasamori.
--Ryunoshin Kamikawa
Kamikawa is an expert in political process theory and has a doctoral degree in law from Kyoto University. He previously served as a lecturer at Ehime University, among other institutions. His publications include "Nihon Ginko to Seiji" (The Bank of Japan and politics) and "Denryoku to Seiji" (Electric power and politics), which was published recently. He is 42.
===
Cash reserves important in uncertain times
Hiroko Ogiwara / Economic journalist
I feel that the past five years were a period in which uncertainty about the future grew slowly but steadily among consumers.
The collapse of the economic bubble in the 1990s and the financial crisis after Lehman Brothers collapsed in 2008 have had a major impact on consumer behavior. However, this was a period of drastic uncertainty, with clear crises, such as banks going bankrupt and the currency crisis.
The current situation is different. There is intuitive uncertainty because of the inability to predict how one's life might change in the future. These are difficult circumstances for consumers.
Prolonged monetary easing has had significant adverse effects on consumers. This is not limited to direct losses in the form of reduced interest income.
Due to negative interest rates, financial institutions have experienced poor profits, and are therefore aggressively extending credit via high-interest credit card loans targeting individuals. As a consequence, the rate of personal bankruptcy has increased. Some financial institutions have also begun demanding "account maintenance fees" if the account holder does not maintain a deposit balance over a fixed amount.
The rise in "drawer savings," or keeping cash at home, is undesirable from the perspective of preventing crime as well. Not only is there the danger of being targeted by thieves, it also increases the risk of bank transfer scams. The limits placed on cash withdrawals at bank teller windows make the process a hassle, but they have been effective in preventing financial fraud as well.
Perhaps more than anything, the problem is that a spending-averse lifestyle has become established among consumers.
The government has proclaimed success, saying, "We are no longer in deflation," but it appears there is an attitude spreading that escaping deflation completely is impossible. In the year after so-called "different dimension" monetary easing was introduced, as much as it was hoped that it might work, it appears there was an equally strong opposite reaction that it is hopeless after all.
With only a vague, growing uncertainty and no way to deal with it, these are truly troubled times. Nevertheless, even in such times as these, it is clear what individuals must do.
Reduce borrowing and increase cash reserves. I think that about sums it up. I believe the deflationary conditions will continue, so it is important to have cash reserves on hand.
There may be some around you who urge investment on the grounds that "Japan has an enormous budget deficit, and a weak yen and inflation will be coming soon enough, so you need to invest." However, it is not too late to take anti-inflation measures even once prices start rising.
Particularly for seniors, one should stay away from the indecipherable financial products recommended by financial institutions. Going forward, as the population declines there will likewise be no need to strain oneself to buy a home.
The era of uncertainty for consumers is likely to continue for some time. It is for this very reason that, in my opinion, one must prioritize cash reserves and ride out these times.
-- This interview was conducted by Yomiuri Shimbun Senior Writer Kazuyuki Kondo.
--Hiroko Ogiwara
Ogiwara was employed in the field of economics before going independent. She explains economic and money issues in terms of everyday life in an easy to understand way. Her publications include "Rozen Hasan" (Bankruptcy before getting old) and "Junengo Hatan Suru Hito, Koufuku na Hito" (People who will face financial downfall and people who will be happy 10 years later). She is 63.
===
The transition to the 'postmodern' period
Kazuo Mizuno / Hosei University Professor
Extremely low interest rates are a sign that the gears of history are turning.
The history of interest stretches back 5,000 years, but only once in all that time have long-term interest rates remained below 2 percent for a multi-year period.
This occurred in Genoa, Italy, in the early 1600s, the transitional period from the Middle Ages to the Modern period. It was the last stage of the major transition the historian Fernand Braudel called the "long 16th century" (1450-1650).
Today, in many of the major industrial nations, including Japan, low interest rates remain under this level. We must consider ourselves to be in the midst of a major transitional period that ought to be called the "long 21st century." I believe the starting point was around the time of the "Nixon shock" in 1971.
Long-term interest rates are thought of as the approximate rate of profit produced by capital. That they are stuck near zero means that the world has been fully developed through globalization, and the "frontier" from which profits may be earned has vanished.
Capitalism itself has reached its limits. In the same way as the long 16th century, the social system of the times has begun the process of collapse.
One can see a hint of this in the behavior of corporations. There have been a string of cases of improper accounting practices and data fabrication by firms such as Toshiba Corp. and Kobe Steel, Ltd. This attests to the fact that this is an era in which profits cannot be increased unless one goes beyond the limits of what's possible.
We must understand this on a historical time scale. Unusually low interest rates continuing for 20 years is a phenomenon characteristic of the transitional period in which we will feel our way toward the next era, that is, the "postmodern" period. One might say that this intensified in the past five years.
From a short-term perspective, the BOJ's "different dimension" monetary easing may make some sense as a macro-level regulatory measure to smooth out the economic cycle. However, as the social system is approaching its limits, it lacks any meaning at all from a historical perspective, which views low interest rates as symbolizing the fact that the social system approaches toward limits.
The long 16th century lasted 200 years. The long 21st century may be somewhat shorter, but I envision the transition to the postmodern period taking as long as four generations, or roughly 120 years. Perhaps it will last until 2100.
In the current stage, it is impossible to predict what kind of world this period will bring, but it will be an era that follows in the wake of the modern industrialized society and its pursuit of "faster, farther, more logical." One should imagine the opposite of the high-growth, high-inflation 20th century.
Venturing to express it in concrete terms, it will be a world in which self-sufficiency is possible within a constrained rather than a global sphere. The European Union is close to this. A sense of this new era can be felt in the new stocks issued by Toyota Motor Corp. three years ago. The dividends are low, and there are transfer restrictions that keep circulation low, but they are structured to guarantee the principal. The image is of temperance rather than greed.
There are things that we must do before the new era arrives. These are to secure sustainable domestic energy, and to work toward fiscal reconstruction now so as to reduce the burden on future generations when low growth will become the norm. At minimum, we must eliminate the annual fiscal deficit as soon as possible.
-- This interview was conducted by Yomiuri Shimbun Senior Writer Kazuyuki Kondo.
--Kazuo Mizuno
Mizuno is an expert in modern Japanese economic theory. He previously served as the Cabinet Office's deputy director general for economic research and is the author of many works including "Shihonshugi no Shuen to Rekishi no Kiki" (The end of capitalism and the historical crisis). He is 64.
Read more from The Japan News at https://japannews.yomiuri.co.jp/
