The Katz-Miyao Debate #8: Katz on Miyao

Richard Katz (The Oriental Economist Report)

This commentary originally appeared in the "Japan-U.S. Discussion Fourm" (http://lists.nbr.org/japanforum) on May 22, 2003: posted here with the author's permission.

Miyao-san,

Let me make sure that I understand your view (http://www.glocom.org/debates/20030519_miyao3/ and http://www.glocom.org/debates/20030519_miyao7/).

1) What most people think of as an unsustainable bubble in the late 1980s, you consider to have been an: "asset-inflationary (bull market) equilibrium with the virtuous circle of high asset prices and increasing returns,"

2) While most economists think the bubble would have collapsed　eventually--because that's what all bubbles do--you believe that "it was largely a policy mistake (tax and interest hikes as well as credit control to push down stock and land prices) which sent the Japanese economy from the high equilibrium to the low equilibrium in the early 1990s."

3) From this, I presume you conclude that, had the policymakers not made this policy mistake, then the boom of the late 1980s could have continued indefinitely.

4) To solve Japan's problems, Japan should return to the bubble--sorry, the asset-inflationary bull market--by "undo[ing] the whole process by giving a big push in the opposite direction."

5) The way to do this is by committing the BOJ and government to buy real estate and corporate shares at a target price, presumably prices approximating those of the 1980s "good equilibrium"--a tactic not to be confused with PKOs.

6) Should this lead, as it has before, to the construction of a glut of buildings without occupants, and thus pressure for prices to fall again, the government can simply raise its target price. It won't even have to buy any of these surplus buildings because it will have changed "expectations." (Being a "smart reader" I can understand that, by making its target "credible," then, "investors can change their expectations at once and the government would not have to actually purchase those assets after all.")

Do I understand your thesis correctly?