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Roadblock At The Bank Of Japan (Int'l Edition)

International -- Finance: Central Banking

Roadblock at the Bank of Japan (int'l edition)

Governor Hayami won't boost the money supply

Masaru Hayami must be the developed world's most unpopular central banker. With Japan's economy in its second downturn in the past three years, Finance Ministry bigwigs, Liberal Democratic Party elders, and Western and Japanese economists are haranguing the Bank of Japan governor to do something--and do it fast. But Hayami won't play.

As the nation's political leaders see it, Japan's big problem is deflation. Prices of everything from stocks to sneakers have been in decline for two years. So Finance Minister Kiichi Miyazawa and his deputies want the Bank of Japan to turn on the printing presses and create some inflation--3% is their target--by increasing the Japanese money supply. The extra cash might coax Japan's yen-pinching consumers to go out and buy goods now--before they become even more expensive. The increased spending would hike tax revenues and help shrink the fiscal deficit. The BOJ could also use the money it creates to underwrite Japanese bonds or even stocks if needed to stave off a crisis.CONTROVERSIAL. The problem is that Hayami doesn't plan to oblige. He sees Japan's price declines as largely a healthy reflection of the rise in discount retailing and e-commerce in Japan. At a press conference in Tokyo on Jan. 23, he said no--that the Bank of Japan had no plans to increase the money supply beyond its normal 2% annual growth rate. And he stoutly defended his controversial call in August, 2000, to raise the Bank of Japan's key official discount rate one-quarter point above zero.

On the latter issue, Hayami is sticking to the argument he offered last summer. Japan's indebted companies are addicted to free money, he said: The only way they will clean up their balance sheets and restructure is if borrowing is more expensive.

Some see the central banker as blind to reality. "Hayami's argument ignores the impact of deflation" and the severe economic damage it can do, says Peter Morgan, an economist at HSBC Securities Inc. What's more, Hayami now lacks the room he once had to experiment with monetary policy. Last summer, when he raised rates, the Japanese economy was clocking about 2% annual growth; corporate high-tech spending and profits both looked robust. Since then, the U.S. slowdown has "knocked [growth] down close to 1%," a BOJ official says.

Another doomsday scenario that hurts Hayami's position involves the Japanese government bond market. Tokyo has spent $1.1 trillion since 1992 to finance massive public-works spending, most of it financed by bonds. Anxiety is mounting in the market about the government's ability to keep issuing debt. If those worries trigger a crash in bond prices, Japanese investors--both institutions and individuals--would suffer greatly. Even the Bank of Japan, which has a bond portfolio of its own, would take a huge hit. Members of the Miyazawa camp say the only way out is for the Bank of Japan to expand the money supply and use some of that money to underwrite new bonds. If the supply of bonds can expand without a hitch, they reason, the market will remain stable.

The BOJ's position is so unpopular in the halls of power that some influential economic thinkers, including former Finance Ministry heavyweight Eisuke Sakakibara, think Hayami, 75, should resign. His term, however, runs to 2003 and there is no sign he wants to shorten it. Hayami's supporters say that boosting the money supply would be far more arduous than Miyazawa suggests.

Pushing the rate of growth in the money supply from 2% to 5%, as some advocate, would add about $126 billion a year to Japan's $4.2 trillion money supply. But to convince skeptical markets that monetary policy had really changed, the Bank of Japan would have to keep printing new yen for a number of years. In the meantime, the market could well conclude that Japan had lost what little fiscal discipline it had left, and the risk of a panic would remain. Nor are there any guarantees consumers would spend even with the inflation dynamic, if they figured higher taxes and spending cuts were coming later to pay down Japan's massive debt load.

If Hayami can somehow convey the risks of Miyazawa's proposals to the Japanese public, he might have the political cover he needs to stay the course. Yet the nuances of monetary policy don't always lend themselves to smooth sound bites. It looks like a tough year for Japan's central banker.By Brian Bremner in TokyoReturn to top

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