Further Response to Craig Freedman

Takahiro MIYAO (Professor, GLOCOM)

This comment originally appeared in the "Japan-U.S. Discussion Fourm" (http://lists.nbr.org/japanforum) on May 25, 2003: posted here with the author's permission.

Let me respond to Craig Freedman's criticism (http://www.glocom.org/debates/20030526_freedman_fcom/). Freedman says that "changing the price of credit is not equivalent to driving up the price of assets via government purchase." There are two points to be made here.

First of all, I would have included (actually did include) interest rate policy in my policy recommendations to give a big push to the Japanese economy several years ago when nominal interest rates were not zero and there was some active demand for credit left in the real economy. But no longer.

Second, as I have repeatedly emphasized, "driving up asset prices via government purchase" is not the main point of my policy recommendation. The point is how to give a big push to the economy that is trapped in the vicious circle of asset deflation (the lower equilibrium). Up until the early 1990s, conventional policy measures like unexpected cuts in interest rates could serve as a big push. Now we need a new idea, and mine is a modification, actually an improvement, of the policy of inflation targeting plus quantitative easing. Set an asset inflation target and announce a credible set of policy measures to turn stock and real estate values around. That would change investors' expectations sufficiently so that the economy could break away from the asset deflation trap. Of course, those credible measures should include some drastic measures like elimination of almost all taxes on stocks and real estate and the BOJ's purchase of ETF and REIT as well as the establishment of public funds to purchase stocks and real estate, if necessary. This last measure is somewhat like the use of military force: the more credible the threat of its use, the less likely the actual use might become.

Finally, I understand Freedman's feeling about the danger of an overheating housing market. That has happened almost everywhere in the past -- Japan had it in the late 1980s. My point is that when the market starts to correct itself eventually, make sure to adopt right policy measures to "soft-land" onto what I call the higher equilibrium with increasing asset prices and increasing income in the long run, instead of "crash-landing," by policy mistakes, towards the lower equilibrium with ever decreasing asset value and income, as has been suffered by the Japanese economy. In other words, we need to distinguish between the market risk and the policy risk. The private sector is only responsible for the former, and we, economists, should worry about the latter.