Federal Reserve Bank of San Francisco President John Williams said Thursday structural reforms are needed if Japan is to solve long-term problems, including its aging society and shrinking workforce, calling monetary policy “a limited tool.”
The potential of the Japanese economy and how fast it can grow “depends on structural policies,” since taxation and other reforms are critical to having a strong and vibrant economy in the long run, he said in an interview.
Monetary policy and some fiscal policy can help the economy grow during bad times, but “that’s really about getting back to the trend, keeping inflation stable around your objectives,” Williams said. “Monetary policy does not change the standard of living 30 years from now.”
Williams, who is visiting Japan to exchange views with government and Bank of Japan officials, said the BOJ’s aggressive monetary policy has so far generated positive effects in two aspects — raising inflation expectations and improving financial conditions.
“Obviously, financial conditions have improved dramatically in terms of the bond market, stock market and the yen,” he said, adding that the yen’s depreciation is a sign that the ultraeasy policy is working.
But he said it takes time to evaluate the effects of monetary policy on the real economy, including consumer spending and employment, and further monitoring is needed to assess whether inflation is moving toward the bank’s 2 percent target and the economy is actually improving.
As for the timing of an interest rate hike by the Fed, Williams said he projects the U.S. central bank may start doing so in the second half of next year because its asset purchase program is expected to wrap up before the end of this year.
“My personal view is I don’t expect us to raise interest rates for the first time until the second half of the next year,” he said. “And I expect any rate increases that happen after that to be relatively gradual, but reflecting economic conditions.”
He said the U.S. economy has been improving steadily, citing a lowering unemployment rate and stabilized inflation, though they are still below the goals of full employment with a jobless rate of 5.25 percent to 5.5 percent and 2 percent inflation.
Regarding the prospects for the global economy, Williams said he sees fewer downside risks than a year or two ago, as the Japanese economy has started recovering and the U.S. debt ceiling has been suspended until March 2015.
But Williams said he is still concerned about low inflation in many countries, including Japan, the United States and those in Europe, saying it is “probably a reflection” that the world economy is not fully recovered from the global financial crisis.
“The global economy is still operating below our potential,” he said.