In his campaign for the Dec. 16 Lower House election, Liberal Democratic Party chief Shinzo Abe has called on the Bank of Japan to set an inflation rate target of 2 to 3 percent, carry out unlimited monetary easing and buy construction bonds directly from the government.
Markets have responded favorably to Mr. Abe’s proposals. Stock prices have risen and the yen has weakened. For the time being, Mr. Abe’s proposals seem to have brought about desirable effects. But his proposals would cause side effects such as rises in long-term interest rates and inflation that is not accompanied by stimulated economic activities.
Mr. Abe appears to be obsessed with the idea that monetary policy will solve most of the major problems the Japanese economy is facing. But that will not be the case. He should realize the simple fact that appropriate government action combined with proper monetary policy by the central bank is needed to solve the economic problems Japan is facing.
Behind his idea of having the central bank directly buy construction bonds from the government may be the LDP’s proposal of spending ¥200 trillion for public works projects over 10 years for the purpose of making the nation resilient to natural disasters. But the Public Finance Law in principle prohibits the BOJ’s direct purchase of bonds from the government.
There is a danger that Mr. Abe’s proposal will lead to a breaking down of the nation’s financial discipline as well as to the use of a massive amount of revenues derived from direct bond sales to the central bank for public works projects whose effectiveness has not been ascertained. This could lower the public’s trust in the state’s financing, thus leading to a drop in government bond prices and an increase in long-term interest rates, which would then raise the nation’s debt-servicing costs.
The BOJ has followed a virtual zero-interest policy for nearly four years. It also started buying financial assets in November 2010. Even with monetary easing, investment is not increasing and deflation has continued for more than 10 years.
Given this situation, Mr. Abe’s call for setting an inflation target of 2 to 3 percent appears unrealistic and could have the effect of raising prices while employment and wages do not improve. Such an outcome would devastate people’s lives.
When the government or political parties stress the importance of the need to pull Japan out of long-term deflation, they must give priority to increasing employment, improving the quality of employment and raising the disposal income of people. They have to present concrete measures to help expand investment by enterprises and consumer spending.
The government in particular has the duty of identifying and supporting sectors whose growth can help improve people’s quality of life. Concentrating on applying pressure on the BOJ as Mr. Abe is doing is nothing but an abdication of political responsibility.