Asia Times: ' . . . until growth is restored'



	April 29, 1999	atimes.com

Japan Economy

'' . . . until growth is restored"

Or hell freezes over. The first was the actual wording used by U.S. Teasury SecretaryRobert Rubin when he told his counterpart Kiichi Miyazawa, at the current G-7 Washingtonconfab, how long Japan must implement stimulus measures ''using all available toolsto support strong domestic demand-led recovery."

Miyazawa, in turn, sought to reassure Rubin that the Japanese economy was bottoming out thanks to enormous increases in government spending, recent tax cuts and Bank of Japan (BOJ) efforts to guide short-term interest rates toward zero. In addition to those measures, said Miyazawa, Japan needs to push for structural reforms such as eliminating excess capacity and modifying its labor structure.

Strange turn of events, that, when an American official stresses demand-side measures and his Japanese interlocutor counters by putting emphasis on the supply side. One is tempted to conclude that Japan is weary of spilling ever more red ink, wants deficit spending to be capped and is using supply-side talk to ward off persistent U.S. criticism. Certainly, traditional Ministry of Finance (MOF) aversion to deficit spending financed with government deficit bond issuance supports such an impression.

The impression is reinforced by the monetary policy stance of the BOJ. At its March 25 policy board meeting (the minutes of which were just released), members voted to make no policy changes. In particular, they voted down board member Nobuyuki Nakahara's proposal that the central bank shift its policy to aim at expanding the monetary base. Nakahara, for the third straight meeting, had argued that the BOJ should take full-fledged ''quantitative easing'' steps by setting as a new policy target a certain expansion rate for the monetary base, currency in circulation and bank reserves, because the ongoing corporate restructuring had adverse effects on the Japanese economy and the current zero interest-rate policy did little to boost corporate investment.

Naturally, there would be little sense in such quantitative easing (printing of new money) if no new demand (and jobs) were created. In that sense, the BOJ's position is consistent with its earlier one this year when it refused to directly underwrite government bonds or even step up bond purchases in the secondary market.

But if the Obuchi government and Finance Minister Miyazawa are betting that expansionary fiscal measures taken to date and zero short-term interest rates are sufficient to bring about their 0.5 percent growth goal this year, they are engaged in a high-risk gamble. Significantly, Economic Planning Agency Director-General Taichi Sakaiya has warned that the impact from now-enacted stimulus packages will fade by this fall - and we tend to concur.

After voting down member Nakahara - former boss of Tonen Co., Japan's largest oil refiner - several times on guiding short-term interest rates to zero last year, the BOJ policy board finally voted to do just that in February. It greatly helped abate pressure on the bond market and would have done a great deal more good had it been adopted when Nakahara first proposed it.

The BOJ board and MOF would do well right now to endorse Nakahara's quantitative easing proposal and enact it in conjunction with a further stimulus package so as to leave no doubt about government determination to see this recovery battle through to the end. In this case, overshooting the target holds no real danger; falling short once again is the disaster to be avoided at all costs.

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©1999 Asia Times Online Co., Ltd.