Wednesday, February 25, 2004

Japan's Recovery?

Stephen Kirchner

Japan’s Recovery. This blog has often been critical of The Economist’s coverage of Japanese monetary policy. Its latest leader on the subject argues that ‘the best case for optimism that this time the recovery will last is that the Bank of Japan’s monetary policy has now become steadily and credibly expansionary.’ This is nonsense. The Economist confuses a change in style, associated with the change in the Governorship of the BoJ a year ago, with a change in substance. The Economist credits Governor Fukui with having ‘printed a lot more money,’ failing to sterilise the proceeds from foreign exchange market intervention and with rhetoric more strongly geared to promoting positive inflation expectations. In fact, all of these initiatives were well established features of monetary policy under former Governor Hayami, whom The Economist calls ‘quite possibly the world’s worst central banker.’

It is certainly true that Governor Fukui has made greater use of some of these policy tools, but almost no one apart from The Economist believes that these amount to a substantive change in policy. As even orthodox monetarists like Robert Hetzel and base money growth-rule advocates like Bennett McCallum would argue, there is no reason to expect increased monetary expansion to translate into stronger growth in nominal income or broader money and credit aggregates given the current monetary policy framework and zero interest rate environment in Japan. The BoJ’s switch to a quantitative approach to monetary policy in March 2001 under Governor Hayami was undertaken precisely so that the BoJ could appear to be taking policy action, knowing full well that these measures did not amount to much in substance.

The fact that Japan is now enjoying another cyclical upswing, with no substantive change in monetary policy since March 2001, is itself a strong argument against the view that monetary policy has been a decisive factor in holding back Japan. Japan has likely seen a permanent reduction in its trend growth rate associated with real factors. Monetary policy is largely irrelevant to this process. Most of the domestic pressure on the BoJ to adopt a more aggressive approach to monetary easing over the years has come from old-line LDP politicians and bureaucrats, the so-called ‘techno-rivalists,’ who see macroeconomic stimulus as a way of avoiding the demands of structural reform. They have a firm friend in The Economist. ...Link

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