LONDON — The governor of the Bank of Japan, Masaru Hayami, and the majority of the BOJ’s policy council have drawn criticism from the Japanese government and leaders of Japanese industry for the decision to end the BOJ’s zero-interest-rate policy. These criticisms have been echoed in the British press. The Financial Times headed its main leader on Aug. 12 “Folly of Japan’s true believers.” A major article in the same paper, headed “Japan’s gesture,” declared that the decision bore “little relation to economic necessity and may hurt the world economy.” The BOJ’s arguments in support of its change of direction on monetary policy have been declared flimsy and unconvincing.
The consensus of economic forecasts for the Japanese economy is said to be that consumer prices will continue to fall, and the BOJ’s statement that “the economy has reached the stage where deflationary concern has been dispelled” is dismissed as unfounded. The BOJ’s decision is regarded primarily as an attempt to assert its independence from government and therefore as essentially a political ploy.
When there is such a strong consensus against the BOJ, it may be rash for an ex-diplomat to question the general view, but, while the decision may seem perverse in light of the current state of the Japanese economy, it is surely right to ask whether the collective wisdom of the BOJ is as wrong-headed as critics allege.
The BOJ argues, rightly, that a zero-interest policy must be only temporary and that a move away from it must be made sooner or later. Perhaps the BOJ has better information on economic trends than the Economic Planning Agency. This would not be hard, considering the number of times the Agency’s forecasts have been out of line; in any case, it is hard to believe that a possible error in the timing of such a move deserves such outright condemnation.
The BOJ has correctly argued that zero-interest rates are a disincentive to saving and to those attempting to live off their savings. It apparently hopes that the change of direction will encourage spending and thus drive the economy forward, but observers think that the opposite may occur and that Japan’s already high rate of saving will grow. We shall see, but there can be no doubt that zero-interest rates are unfair to those who have saved for their retirement.
More important is the BOJ’s argument — again, I think, justifiable — that zero-interest rates have encouraged profligate borrowing and lending by both the government and the private sector. Zero-interest rates increase the danger of moral hazard and discourage government and private-sector restructuring.
The Japanese government has in recent years adopted the bad habit of believing that the only way to drag the Japanese economy out of recession is to throw money at it. If government spending were used only for projects where a real return could be expected, the government might be able to spend its way out of recession. Unfortunately many, if not most, projects seem designed to pander to the lobbies in agriculture, construction and small business. The money is often spent on projects that are not wanted even by the communities they are supposed to benefit.
The ratio of government debt to GDP has already risen to a record level, forcing the rating agencies to question whether Japan’s public debt any longer deserve the high rating it has been receiving. The minuscule rise in interest rates implied by the BOJ’s decision to end its zero-interest rate policy should be a warning to the government that profligate spending will cost the Japanese taxpayer more in interest payments in the future.
Some argue that significant restructuring is under way in the private sector. Certainly it has begun, but how far has it gone? Many industries — for example, food processing — are so well-protected by regulations and barriers to new entry that they see no need to restructure. Unfortunately, protection breeds complacency, and a decline in Japanese standards of quality control and hygiene has been the result. Japan’s reputation has been undermined in the wake of highly publicized failings, notably at Snow Brand Milk Products Co., where workers reportedly did not clean factory pipes and valves for weeks.
Other Japanese food firms have also been forced to recall products that have gone moldy or caused sickness. The London Economist headed a report on Japan’s food industry with one word: “Rotten.” It reported that the industry employs almost 11 percent of Japan’s total manufacturing workforce and quoted a McKinsey research study showing the overall productivity of Japan’s food-processing industry to be only 39 percent of that achieved by U.S. food processors. The “excessive regulation” that this report also noted does not seem to have been effective in preventing disease and unsanitary conditions. The problems besetting the Japanese food industry may seem a far cry from the BOJ’s decision on interest rates, but the message is the same: Unless the mess is cleared up soon by encouraging competition and greater efficiency, it will cost the government, as well as consumers and taxpayers, dear.
It is hard to keep in mind, after all the tirades against the BOJ, that the controversial change it proposes is so minuscule, one of direction rather than substance. The reaction seems out of proportion. The Financial Times took the view that “the danger is that the economy will be damaged, not by the rate rise but by the political reaction.” That gives unwarranted credence to the almost hysterical comments of Japanese Cabinet ministers, who have not shown themselves to be greatly endowed with either economic or political wisdom.
The foreign reaction could be ascribed to self-interest. The Financial Times summed up this perspective by declaring that the real worry was that “the rate rise will further unbalance the world economy, casting a shadow over Japan while the U.S. continues to boom.”
Is the BOJ being complacent about the dangers? Has it — as alleged — “just increased investment risks”? I don’t know, but it is necessary from time to time to question the received wisdom of the consensus. I hope that the BOJ is right and that Hayami’s message about the urgent need for restructuring will penetrate the minds of the old men who run the Japanese government and Japanese industry.
In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.