Response to Richard Katz' Rejoinder

Peter Tasker (Arcus Investment)

This article 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.

Rick Katz points out correctly that Taku Yamasaki, Koizumi's right-hand man and a founding member of the "YKK" group, is by no means a pure reformer. In fact I'm afraid there are very few reformers in the Japanese political world pure enough to meet Rick's standards. However the closest is probably Heizo Takenaka, who is indeed a proponent of inflation targetting. So the debate is not simply one of men in black hats versus men in white hats. Nonaka and other dinosaurs have come out against inflation targetting for the reason I adduced. When the pendulum swings away from reform to economic stimulus - and it will swing before too much longer - they want to make sure that the priority is on good old-fashioned pork, not esoteric debate about money market operations.

As for the BoJ 's role, this forum is not the right place for a detailed discussion of the relation between money and prices. Suffice to say that Japan slipped into deflation in 1995. For the first 3 years, the BoJ simply pretended it hadn't happened. For the next two it claimed that deflation was actually a positive phenomenon - the infamous "yoii defre ron". We don't hear that any more. Instead the BoJ has shifted to the nihilistic stance that deflation may be destructive but it can do nothing about it anyway. Unfortunately, goes the argument, its legally established duty to maintain price stability is simply impossible to fulfil.

Contrast this with the current situation in the US. The US economy is some distance from falling into deflation, but the US authorities, unlike the Japanese authorities in the 1990s, are highly sensitized to the risks. Here's a quotation from a recent newspaper article -

"In a speech last November, Ben Bernanke of the Fed promised it would use 'whatever means necessary' to fight deflation and listed a range of weapons at its disposal. But, he says, the important thing is for the central banks to get their message right. Mr Rogoff (of the IMF) says: 'The real key to avoiding embedded deflation is for the monetary authorities to have a coherent communication strategy, making absolutely clear that they have both the intent and the ability to maintain positive inflation rates over the medium term.'"

The exact opposite of the BoJ's stance. Of course it may be that Rogoff and Bernanke are simply wrong, and Hayami is right. As I said, that's not a debate for this forum. But politically the problem for the BoJ is that it has painted itself into an intellectual corner. If inflation targetting or any other form of super-aggressive monetary policy were to produce the results the advocates claim, then it would be clear that the BoJ's self-justifying mantra that "deflation is not a monetary phenomenon" is wrong and that errors of monetary policy had played a large part in the debacle of the past five years. Such an admission would surely end the BoJ's short-lived period of independence.

To summarize my view. The BoJ resists inflation-targetting because it introduces accountability and all elite Japanese institutions abhor accountability like a vampire abhors daylight. Secondly the BoJ cannot embark on monetary policy measures which might succeed since that would imperil its independence. It can only embark on measures that it is confident have little chance of success.