At the Group of 20 meeting of finance ministers and central bankers in Washington on April 18-19, a focal point was the massive monetary easing adopted by the Bank of Japan under its new governor, Mr. Haruhiko Kuroda, who was appointed by Prime Minister Shinzo Abe.
Participants at the meeting showed a certain degree of understanding of Japan’s monetary policy. But both the government and the BOJ must realize that they have a great responsibility to carry out economic and monetary policies with utmost care.
A fear was expressed at the meeting, especially by developing countries, that Japan may be trying to increase its exports through devaluation of the yen. A concern was also aired that the BOJ’s policy may lead to a large inflow of funds into developing economies, thus causing undesirable effects there.
After the meeting, Mr. Jens Weidmann, president of Germany’s Bundesbank, noted that the Group of 20 emphasized that Japan’s monetary policy should not be used to manipulate exchange rates and spark competitive devaluations.
Despite the fear and concern, the G-20 meeting adopted a communique that accepted the BOJ’s aggressive monetary easing by saying that “Japan’s recent policy actions are intended to stop deflation and support domestic demand.” The communique regarded the BOJ’s policy as part of some countries’ efforts to stimulate economic activities. The endorsement of the BOJ’s policy is due partly to Mr. Kuroda’s persuasive efforts aimed at the chiefs of other countries’ central banks. But Japan should not forget that the communique also said that “Japan should define a credible medium-term fiscal plan” to achieve “balanced medium-term fiscal consolidation.” This shows that the G-20 countries think that fiscal stabilization in Japan is indispensable to helping to ensure sustainable global economic growth.
Japan’s outstanding government debts already exceed 200 percent of its gross domestic product. The Abe administration is expanding fiscal spending to help stimulate the economy, and the purchase of government bonds by the BOJ will increase. Japan should understand that G-20 countries are calling on Japan to work out a convincing road map to reduce its debts. Once trust in Japan’s fiscal discipline is lost, it would cause havoc not only on the Japanese economy but also on the world economy.
Japan also should note that the G-20 communique said that “we will refrain from competitive devaluation and will not target our exchange rates for competitive purposes.”
The communique also said that “we reiterate that excess volatility of financial flows and disorderly movements in exchange rates have adverse implications for economic and financial stability.” If an inflow of funds into developing economies caused by Japan’s monetary easing leads to asset inflation and speculation in food and natural resources, Japan can be the target of criticism.
The government and the BOJ must recognize that since G-20 countries think that Japan’s monetary easing is necessary to help the global economy grow, they refrained from criticizing it. Japan faces an extremely difficult task of attaining economic growth while ensuring a steady reduction of government debt.