Abe economic policy raises serious questions

Plans for ending deflation run risk of hyperinflation, analysts say

by Jun Hongo

Staff Writer

Not satisfied with bending Prime Minister Yoshihiko Noda to its will for a snap election, the Liberal Democratic Party has set its sights on Bank of Japan Gov. Masaaki Shirakawa, at No. 36 the highest-ranked Japanese on Forbes magazine’s 2011 list of the world’s most powerful people. (Noda was ranked 62nd.)

In a lecture last week in Kumamoto Prefecture, LDP President Shinzo Abe declared the party “would like someone (as BOJ governor) who will agree with our inflation target” of 2 to 3 percent, in a slap at Shirakawa, who has been reluctant to implement monetary easing “without limit,” as the LDP wishes, to end chronic deflation.

Japan’s extended economic slump may call for extreme measures, but some are questioning Abe’s monetary and fiscal proposals.

“The Bank of Japan has become the target of criticism, but they’ve carried out their jobs and issued enough cash,” Masaya Sakuragawa, a professor of finance at Keio University in Tokyo, told The Japan Times. “The problem is that quantitative easing hasn’t been able to impact the market enough.”

The expert also warned that the policies of the man who may replace Noda after the Dec. 16 election risk hyperinflation.

To be sure, the market has reacted favorably to Abe’s reflationary proposals. The yen has fallen against the dollar and stock prices have risen — feats the ruling Democratic Party of Japan couldn’t achieve by intervening in the foreign exchange market with trillions of yen.

“Expectations are high for an LDP-led government,” Toru Yamamoto, chief strategist at Daiwa Securities, said during a lecture Wednesday in Tokyo, adding that the yen may continue to weaken for a while under a new administration.

But pundits question whether Abe’s proposals will have an enduring impact on deflation, with many pointing out that low demand, not a weak flow of money, is at the root of the problem.

Lavish spending on public works, which Abe has proposed to stimulate the economy, will also rewind recent efforts to cut the government’s bloated debt.

Even if Abe’s reflationary policies succeed in ending persistent deflation, history shows that his extreme measures are a strong pill with potentially serious side effects.

After the end of World War II, the government forced the BOJ to buy government bonds to quickly generate cash to fund a recovery. The resultant hyperinflation saw commodity prices spike 70-fold from 1945 to 1949.

In 1998, a new law abolished the power of the finance minister to replace top BOJ executives, giving the central bank greater independence.

The new law also stipulated that the government only has the right to ask the board to delay a vote on monetary policies it opposes until the next meeting.

But among the LDP’s pledges revealed by Abe on Wednesday was a proposed amendment of the BOJ law.

“For Abe to propose changing the rules is off beam. There are other things the government should be taking care of to revive the economy,” Keio University’s Sakuragawa said.

While debating the level of BOJ independence is healthy, it is not something that should be decided on the spur of the moment, he added.

Finance Minister Koriki Jojima said at a news conference Tuesday that some of Abe’s proposals go against “lessons learned from history.” It is common knowledge among developed countries that government intervention in central bank decision-making can have serious repercussions, he added.

Shirakawa, whose term expires in April and is likely to be replaced if the LDP wins the next election, was also quick to bark back at Abe.

“Long-term interest rates may spike and have a negative influence on the economy” if the BOJ is seen as financing the government, Shirakawa said Tuesday in a news conference.

Abe initially said the BOJ should directly purchase the government’s construction bonds, but retracted his remark, saying the central bank should buy bonds from the market.

On the direct purchase of the government’s construction bonds, the most powerful man in Japan offered a tip to Abe.

“When applying brakes on issuing currency notes becomes difficult, there will be multiple repercussions,” he warned.