Rejoinder to Peter Tasker

Richard Katz (The Oriental Economic Report)

This commentary originally appeared in the "Japan-U.S. Discussion Fourm" (http://lists.nbr.org/japanforum) on February 7, 2003: posted here with the author's permission.

Peter Tasker is certainly right that, if the choice is fiscal versus monetary stimulus, some of the LDP dinosaurs prefer bridges to nowhere. However, other dinosaurs in the LDP and some of their compatriots in the MOF prefer monetary steroids for the mirror-image reason: it would reduce pressure for fiscal stimulus. Indeed, the 1ate 1980s bubble took place partly because the MOF insisted on a monetary rather than fiscal response to the depressive effect of the rising yen.

In addition, there are those who think that inflation targeting will bail out the banks and their borrowers. For example, Peter mentions Taku Yamazaki and cites him as an ally of Koizumi and therefore, presumably a reformer. But the fact is Yamasaki has long been an advocate of bailing out the banks by having the government buy their bad loans at extremely excessive prices, i.e. face value minus loan loss reserves. If Yamasaki were successful, Takenaka's leverage over the banks would be cut off at the knees.

However, I'm confused by Peter's statement:

"Like the Bank of Japan, they are scared that aggressive monetary policy might actually work."

Accusing the BOJ of wanting monetary stimulus to fail is a pretty serious charge. What evidence do you have? What would be the BOJ's motivation for wanting to fail?