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Harry
Truman probably would have had some problems with
Masaaki Shirakawa.
It was
the former
US
president who famously requested a one-handed economist
who wouldn’t offer “on the one hand, on the other hand”
solutions. Truman might have been disheartened by Bank
of Japan (BOJ) Governor Shirakawa’s latest musings.
On the
one hand, Shirakawa on May 12 said, “Right now, we must
focus our attention on the downside risks” to the
economy. On the other, he warned that keeping interest
rates “extremely low” could prompt companies and
consumers to make excessive investments and misallocate
resources.
Well,
which is it? Is
Japan’s
0.5-percent overnight-lending rate too high or too low?
It depends on your view of Asia’s biggest economy and
the central bank’s role in it.
Yet,
Shirakawa has already dropped a hint he won’t be the
fresh thinker the BOJ needs in these trying times. He
did that recently by omitting a reference to the BOJ’s
desire to increase interest rates. It was the first such
omission in two years.
Granted,
global gloom makes it politically difficult for the BOJ
to continue letting rates rise in the short run. The
central bank expects 1.5-percent growth in the year
ending March 31, less than an October estimate of 2.1
percent. Even though
Japan has grown steadily since 2002, household spending
hasn’t risen enough to hasten things.
Inflation trends aren’t helping. After roughly a decade
of deflation, Japan’s core consumer prices, which
exclude fresh food, rose 1.2 percent in March from a
year earlier. That, in itself, won’t force rate
increases; prices aren’t likely to deviate much from the
zero to 2-percent range the BOJ prefers.
Looking
ahead
“I would
say that the BOJ has a reasonable and balanced view of
the situation, and does not appear to be focused just on
inflation,” says David Burton, director of the
International Monetary Fund’s Asia-Pacific department in
Washington.
Burton
notes that core inflation “remains very low” and that
“there are downside risks to the growth outlook” for
Japan’s economy. “In these circumstances, taking a
wait-and-see attitude on monetary policy, which is what
the BOJ is doing, seems to me to be the right approach,”
he says.
That’s
fine for now, yet, Shirakawa should be looking to the
future. The need to boost rates is about reducing
Japan’s dependence on what is essentially free money.
Even if today isn’t the time to tighten credit, it
wasn’t a good idea to remove the general bias toward
doing so.
Free
money
It
reminds investors that Shirakawa may not be the most
independent BOJ leader. He was, after all, a compromise
candidate after Prime Minister Yasuo Fukuda’s first two
BOJ picks were rejected. It also signals to an already
complacent government that it need not worry about
higher borrowing costs.
Shirakawa’s predecessor, Toshihiko Fukui, raised rates
twice between March 2003 and March 2008. When
Fukui left,
Japan’s
interest-rate environment remained anything but normal
by global standards. Shirakawa’s actions so far suggest
the rate-normalization process is being shelved.
That’s a
mistake.
Japan’s
banks deserve credit for avoiding the worst of the
global crisis, yet they get low marks for providing it.
After almost a decade of zero interest rates, Japan has
little credit growth to show for its extraordinary
efforts.
Albert
Einstein wasn’t thinking of Japan when he said insanity
means doing the same thing over and over again and
expecting different results. Yet why do officials in
Tokyo decide over and over again to leave rates near zero,
expecting the policy suddenly to work?
Demand
for credit
Even
with rates this low, says Michael Taylor, London-based
economist at Lombard Street Research, broad money growth
advanced just 1.9 percent in the 12 months to April. The
real problem is demand for credit. Without improved
confidence in the economy’s outlook, households and
companies will be no more willing to borrow than banks
are to lend.
That’s a
bigger concern than meets the eye. There are so many
long-term challenges Japan isn’t tackling. It has the
largest public debt among industrialized economies, weak
workplace productivity, a rapidly aging population and a
negligible birthrate. It also isn’t doing enough to
compete with an ascendant China or India.
Ultra-low rates complicate efforts on all those fronts.
They reduce the urgency for bold action among
politicians and give corporate executives a false sense
of comfort about the health of the economy. It’s in that
spirit that the BOJ should aspire to get rates as far as
possible from zero.
Shirakawa may feel he needs to offer
on-the-one-hand-on-the- other-hand assessments of the
economy. The trouble is, Japan’s reliance on free money
means it’s essentially tying one hand behind its back.
The fear
of higher rates has become as irrational as it has
become ingrained. It’s not unlike the fear of recession
in the US economy. Downturns happen, so get used to it.
The same
goes for rate increases in Japan. Far from being the end
of the world, they are the key to restoring stability to
an economy that’s anything but stable. |
