TOKYO -- A long time has passed since Japan, Europe and North American entered an era of low growth. Central banks in these regions are being required by the public to not only stabilize their respective currencies but also pump up their economies and prop up share and real estate prices. However, excessive reliance on monetary policies would cause negative effects.
In an interview with the Mainichi Shimbun, former Bank of Japan (BOJ) Gov. Masaaki Shirakawa, 69, underscored the need for Japan's central bank to accurately analyze the country's economy from the viewpoint of sustainability and notify the public of the basic agenda that needs to be addressed.
Excerpts of the interview follow:
Question: When you were serving as BOJ governor, you came under bitter criticism that deflation and the yen's appreciation were caused by the central bank's reluctance to relax its monetary grip. How did you feel about that?
Answer: I was scared with the mood of the times. I was determined to protect our stance that we can't compromise as the central bank. Opinions were prevalent that "since deflation is a monetary phenomenon, consumer prices will rise if the monetary base is increased" and that "what's necessary is for the BOJ to show its seriousness" in tackling the problem. I think few people now believe in these views.
Q: Under the leadership of Gov. Shirakawa, the BOJ implemented so-called non-conventional credit-easing policies such as the central bank's purchase of government bonds and corporate bonds. Do you think these policies were meaningless?
A: I don't think non-conventional credit-easing policies were meaningless. Needless to say, these policies were meant to prevent the destabilization of the financial system. However, my assessment of these policies is that they didn't have a large effect on the real economy.
The effects of credit easing policies on stimulating the economy, whether they be conventional or non-conventional, are generated as a result of causing interest rates to decline. If both long- and short-term interest rates come close to zero, there is little room for further decline, as a result of which the effects of such measures gradually decrease.
Moreover, the effects of monetary policies are basically to bring forward tomorrow's demand to today (by lowering interest rates), namely shifting the timing of spending money. Monetary policies aren't aimed at increasing demand for a long period of time. While trying to bring forward demand, the central bank needs to deal with basic challenges.
Q: What are the challenges to the Japanese economy that should be tackled?
A: The challenges that Japan should deal with are responses to the aging of the population, the declining birthrate and depopulation. More precisely, the Japanese economy and society's failure to adapt to these changes is a big problem. It's indispensable for the government to reform the social security system into a sustainable one. Companies should strive for innovation and members of the public should support such reforms while thinking about the future of their children and grandchildren. Economists and news organizations should play an important role of communicating the necessity of such reforms to the public. The BOJ, as the country's biggest economic think tank, should fulfill its role of precisely analyzing the Japanese economy from the viewpoint of sustainability and notifying the public of the basic agenda. If the agenda is not set correctly, the central bank's monetary policies will be ineffective and could be even counterproductive.
Q: Why did so many people believe the view that deflation is the biggest problem in the Japanese economy?
A: That's probably because the interpretation of deflation differed from person to person. For ordinary people, deflation didn't mean a decline in consumer prices but dissatisfactory economic conditions that include uncertainties about their future and employment insecurity. The government called a continual decline in consumer prices "deflation." However, this definition reminded people of a deep recession in the 1930s, and evoked a sense of fear among the public.
Painful structural reforms can hardly win support. In addition, European and North American economists advocated policies with the world economic conditions in the 1930s in mind. Under these circumstances, if people heard opinions that the problems could be solved if deflation was overcome through monetary easing, few of them would voice stiff opposition. However, the fundamental problems involving the Japanese economy aren't attributable to a gradual decline in consumer prices. The non-conventional credit easing policies were effective to a certain extent. However, society's vitality was not directed at necessary fields because the agenda wasn't set in an appropriate manner. This was the biggest problem.
Q: In January 2013, under the leadership of Gov. Shirakawa, the government and the BOJ agreed on a joint statement that they would strive to achieve the 2 percent inflation target as early as possible. However, this hasn't been accomplished yet. Was the target wrong?
A: It's necessary to understand why consumer prices need to be stabilized. What's important is to create a stable environment in which consumer prices will not drastically fluctuate. Having a numerical image of stable consumer prices is important. If you simply try to achieve a fixed numerical target in a short period of time, efforts to see if the policies are sustainable would be put on the back burner. Therefore, the joint statement says that policies will be implemented while examining whether the monetary situation is imbalanced and that broad efforts would be made focusing on the economy so that we wouldn't have to simply aim for the 2 percent goal.
(Japanese original by Takayuki Sakai, Business News Department)
(This is Part 1 over a two-part interview)