Japan's Maverick Banker May Make Sense

Who will capture the new electorate of the New Economy? Will either political party be able to reconfigure itself to incorporate one of the fastest-growing segments of the voting population? These are among the most significant

There is something slightly bizarre about the price of money in Japan these days. For the past 15 months, the Bank of Japan has been practically giving the stuff away. Japan's benchmark overnight call rate is virtually zero and other short-term rates are at record lows. Despite massive budget deficits, even long-term bond rates are all of 1.6%.

This ultra-loose monetary regime, introduced in the darkest days of Japan's recession, certainly averted a world-class catastrophe. But an increasingly independent BOJ, under Governor Masaru Hayami, thinks the party should end--in flat defiance of the International Monetary Fund, U.S. Treasury Secretary Lawrence Summers, and some of the best minds in economics. Some want him to stay put. Others want him to really open the monetary floodgates and create enough inflation to heat up the economy.

Both sets of proposals are off base. And the BOJ's international critics are completely misreading what Hayami is trying to accomplish. Japan does have its share of problems--excess debt, capacity, and labor, to name three. But the economy circa 2000 is far stronger than during the crisis years of 1998 and 1999 as the cumulative effects of the Asian financial crisis, ill-timed tax cuts, and bank and brokerage failures put the economy in grave danger. The zero-rate regime, plus a government bailout, has stabilized the banks. Big pockets of the economy are opening up to foreign investment. Restructuring is no longer anathema. Earnings and fixed investments are heading north. And Japan's Internet economy is gathering speed. Consumers are still skittish, but the economy should pull off 1% or so growth in the year ahead.

Still, inflation is scarcely a problem, so why does the BOJ want to pull the trigger now and tighten? Hayami points to two reasons that should be taken seriously. First, the zero-rate regime has given the economy's biggest debt holders--construction, real estate, and assorted smokestack industries--too much of a free ride. Now that the economy has at least stabilized, Hayami wants to turn up the pressure on them to get back into financial health. Hayami also has a deep distaste for the wealth transfers from savers to debtors that such an ultra-loose policy entails. A big chunk of Japan's $12 trillion in household savings are languishing in bank savings accounts yielding roughly 1%.

Ditto for his total disregard for the inflation advocates at home and abroad. They think the BOJ should underwrite Japanese government bonds and push the money supply to double-digit levels to take the debt pressure off Corporate Japan and get consumers spending again. Hayami is right to object. The last thing Japan needs is to signal to the world that it has lost what little fiscal discipline it has left. And once you let the inflation genie out of the bottle, it takes a painful amount of tightening to put it back in. Hayami's basic message is this: Forget the short fixes and stay focused on the kind of restructuring that will get the economy back on the fast track. In a nation full of Keynesians and quick-fix monetarists, that makes him something of a heretic. But as Hayami will tell you: The truth shall set you free. At least it makes for a persuasive argument.

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