One Vote for the Bank of Japan

Once again the long knives are out for Bank of Japan Governor Masaru Hayami. Prime Minister Yoshiro Mori's government and an array of economists think Japan's deflationary pressures and signs of an imminent recession call for some radical monetary measures. And they were hardly impressed by the BOJ's move on Feb. 9 to trim the largely symbolic overnight discount rate by 15 basis points.

What Hayami's detractors really want is a dramatic ramping up of the money supply, committing the BOJ to an inflation target of 3% to 5% and the underwriting of fresh Japanese government bonds. Reason: Japan's problem is collapsing prices, not rising ones, they say. And with a U.S. slowdown hitting Japanese exporters hard and business investment drying up, it is time to think the once unthinkable and court inflation to get consumers back into the business of consuming.

Hayami is dead-set against this policy. He argues that the price deflation over the past two years isn't necessarily a bad thing. It may reflect the dismantling of Japan's high-cost economy as new forms of distribution such as 100-yen discount shops, cheap textile imports from China, and lower air fares take root. Lower prices raise the living standards of Japan's long-abused consumers.

Hayami worries that if Mori's Liberal Democratic Party-run government gets more money courtesy of the BOJ, it will steer to its pals in Japan's construction industry. That won't help the wider economy much. Of course, Hayami and his team have to be extra vigilant in the months ahead to prevent another financial crisis. But monetary policy should not be hijacked by politicians who resist the kind of economic--and political--pain that serious restructuring brings.

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