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Abe adviser Hamada wants more pliant BOJ

Yale scholar raps Shirakawa, backs monetary action against deflation

by Hiroko Nakata

Staff Writer

With his harsh criticism of the Bank of Japan in the spotlight, Shinzo Abe’s economic brain, Koichi Hamada, said it was a big step forward for the central bank to finally adopt the new prime minister’s 2 percent inflation target last week.

“The (combined) effort by the government and the Bank of Japan (on Jan. 22) was certainly a substantial advance,” Hamada told The Japan Times in a recent interview. “I’m glad that there was a strong . . . coordinated action between the government and the BOJ.”

Hamada, 77, a professor emeritus of economics at Yale University, is a major adviser of the prime minister’s “Abenomics” economic policies. Hamada has repeatedly blamed the BOJ for failing to pull the country out of nearly two decades of deflation, and even feels the BOJ Law should be amended to lessen the bank’s independence.

For decades, policymakers, lawmakers, scholars and in particular the mass media did not listen to Hamada and other advocates who insisted that effective monetary policy was the only way to prevent both the yen’s excessive rise and prolonged deflation.

Hamada nearly lost confidence in economists because he could not “guide” BOJ Gov. Masaaki Shirakawa, who was one of his students at the University of Tokyo in the 1970s, in the “right direction,” he wrote in his book “America wa Nihonkeizai no Fukkatsu wo Shitteiru” (“America Knows the Japanese Economy will Revive”) published this month.

In the book, Hamada reveals the conversation when Abe telephoned him before the Dec. 16 election, when he was still just the president of the opposition Liberal Democratic Party. Asked if he agreed with Abe about the BOJ’s monetary policy, Hamada replied: “Your view is absolutely right. Please pursue your policy with confidence,” according to the book.

Hamada, who taught economics for more than 40 years at Yale, Todai and other universities, said Shirakawa, who was one of his brightest students, changed at some point after he went to work at the BOJ.

As Abenomics gained attention, Hamada’s attack on the BOJ and push for the 2 percent inflation target sparked debate among economists and critics over whether the central bank could really achieve this goal when the Japanese economy is currently failing to see even a 1 percent price rise. Some argued it is not appropriate to depend solely on monetary policy to rescue the economy from deflation.

Asked if the BOJ was being made a scapegoat for past failed economic policies on the part of the government, Hamada said that notion came from a “wrong understanding of macroeconomics.”

“It’s a matter of money,” he said. “The first stage of a recovery is, I would say, 90 to 80 percent through monetary stimulus.”

Monetary stimulus other than lowering interest rates includes conducting quantitative easing and buying unorthodox assets, or so-called comprehensive easing, he said. “And if (these efforts don’t) work because interest rates stick to very low levels, then (a fiscal push by) the government . . . may be needed. But the main force should be monetary policy.

“The monetary policy of the BOJ has been very restrictive” in the fight against chronic deflation and the yen’s rise against the dollar, Hamada added.

The high-profile adviser said monetary easing should be supported by other policies to energize the economy, including helping innovative technologies and industries through deregulation.

Hamada has criticized Shirakawa for sticking to the BOJ theory that monetary policy cannot stop deflation. But merely showing a determination to fight deflation, like the government has in recent months, can shore up stock prices and lower the yen against the dollar, he added.

Abe’s controversial economic policy, which has recently led to a steady fall in the value of the yen against other currencies to the benefit of Japanese exporters, has raised concerns among other policymakers that it could trigger currency wars and protectionism.

Over the weekend in Davos, Switzerland, German Chancellor Angela Merkel complained about what she called “political influences or manipulations of the exchange rate.”

Hamada warned, however, that the effectiveness of the BOJ’s latest monetary easing is not going to be as good as the central bank boasts.

“The actual amount of market buying operations may not be sufficient. And there is a tendency that the Bank of Japan would like to postpone anything it dislikes,” he said. “We should always say we (will) continue (to pursue) monetary expansion until . . . deflation is over and some inflationary pressure is seen.”

Still, as for the BOJ’s latest monetary easing, Hamada said the inclusion of the phrase “as soon as possible” in achieving the 2 percent inflation target in the joint statement is much better than its draft, which pledged to reach the target “in the medium to long term.”

Hamada said the BOJ Law should be amended to hold the central bank liable if it misses the inflation target. Any amendment, he said, should also include holding the BOJ responsible for improving the employment rate, although the bank can only affect the rate via monetary policy.

Hamada also said it is important to continue buying government bonds to meet the expectations of financial markets.

In the past, inaction on the part of the BOJ as well as negative comments on its role in fighting deflation, following its easing last February, weakened the central bank’s effectiveness.

If the BOJ’s asset-buying in its latest easing action is inadequate, the government should get the bank to agree to boost the amount, said Hamada, whose name has been floated as a possible successor to Shirakawa when he steps down in April.

“There is no point (in) stopping sufficient buying as long as deflation continues. The problem (with) the present BOJ Law is the BOJ’s ‘osumitsuki’ (official guarantee) that it can act independently from the government,” he said. “That is why I think the BOJ Law should be amended.”