Asia Times: EDITORIAL: Long on memory, short on vision



	February 12, 1999	atimes.com

Japan Economy

EDITORIAL: Long on memory, short on vision

Since the beginning of this month, several proposals have been put forwardby Japanese political leaders to combat the economy's deflationary spiral,spur recovery and relieve pressure on bond yields by monetizing governmentdebt.

Most notably, Liberal Party leader Ichiro Ozawa, new coalition partner ofPrime Minister Keizo Obuchi's LDP, has proposed that the Bank of Japan(BOJ) be instructed by parliament to underwrite at least Y5 trillion in newbonds. Chief Cabinet Secretary Hiromu Nonaka, the man who brokered theLP/LDP coalition, has called on the BOJ to step up bond purchases in thesecondary market through open market operations.

But at the BOJ, such pleas and proposals have fallen on deaf ears. GovernorMasaru Hayami has issued a flat ''no'' to both direct underwriting andstepped-up open market purchases. He says that interest rates are not too highand he does not want to open the ''floodgates'' to inflation.Economic Planning Agency chief Taichi Sakaiya similarly sees no need for the BOJ to make direct or secondary-market bond purchases, saying there are sufficient signs ofrecovery to make such BOJ action unnecessary.

Meanwhile, Finance Minister Kiichi Miyazawa, who should have the most to sayabout such matters, has been mostly mum on it. Late last week, afterNihon Keizai Shimbun reported that U.S. Treasury Secretary Robert Rubin hadrecommended debt monetization, Miyazawa commented: ''Nobody heard him say it''.The old fox is hedging his bets.

Looming behind the reluctance of economic bureaucrats to endorsemonetization are some long, bad memories.

To combat the post-1929 depression, Japan, under the leadership of then-Finance Minister Korekiyo Takahashi, in November 1932 adopted a system of issuing governmentbonds through BOJ underwriting. The scheme initially worked, since the BOJ was able to sell all or most of the underwritten bonds to private financial institutions. But as the economy recovered, it became increasingly difficult for the BOJ to find private-sector bond buyers. Attempts by the Ministry of Finance to progressively decrease bond issuance in the mid-1930s were blocked by the military, which needed massive amounts of funds to finance the invasion of China. Restoration of fiscal discipline became impossible with the military coup of February1936 - the victims of which included Takahashi, who was assasinated - and the subsequent war in Asia. Hyper-inflation finally ensued.

To banish forever such bad memories, the BOJ is banned by the Fiscal Lawand the BOJ Law from directly underwriting Japanese government bonds (JGBs)- which in effect would mean printing money to cover the nation's debt. Butboth laws also say that the central bank could underwrite JGBs within alimit approved by the parliament if there were special reasons. Since ``specialreasons'' are not defined in the laws, the government could adopt thescheme if there were the political will and guts to do so.

The government will issue 31 trillion yen in new bonds in fiscal 1999/2000 andby the end of it will sit on a Y300 trillion bond total. Surely, that's afiscal nightmare in the making that need not be compounded by aggressivereflation (induced inflation), which might be difficult to get back undercontrol in the future.

On the other hand, some combination of the Ozawa/Nonaka tactic (limitedunderwriting plus secondary-market purchases) could hardly do much harm andwould appear to be just the right stuff at the moment - and to hell withancient history. After all, Miyazawa-san hardly need worry about getting shot bySelf-Defense Forces coup-makers.

''Foreign pressure'' (gaiatsu) is the favorite excuse for doingthings Japanese may want to do but may not want to go out on a limb to do. Soperhaps all this is Robert Rubin's call: He could say to Miyazawa (orwhomever): ''Yes, I said it."

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©1999 Asia Times Online Co., Ltd.