In a bid to jump-start the Japanese economy out of a deflationary state, the Bank of Japan decided on monetary easing measures in February and April, including the setting of an inflation rate target of 1 percent.
Despite such efforts, lawmakers from the ruling and opposition parties continue to call for even further pump-priming measures.
In an exclusive interview with The Asahi Shimbun, Bank of Japan Governor Masaaki Shirakawa was asked his views on what responsibility the BOJ and politicians had for moving Japan out of deflation and rebuilding the nation's fiscal condition.
Excerpts of the interview follow:
Question: What was the aim of the BOJ in implementing a series of monetary easing measures even with positive signs emerging from the economy?
Shirakawa: In the BOJ Policy Board meeting in February, we decided to set an inflation rate target of 1 percent for the time being and to implement strong monetary easing measures until achieving that goal was in sight. We felt that in order to clearly transmit the BOJ's stance it was important that actions also accompanied words.
In the April meeting, the decision was made because we wanted to make the trend toward improvement of the economic and price situation more certain and to carefully foster such trends.
Q: What kind of effects can we expect?
A: The first effect is the lowering of long-term interest rates. Even if corporate profitability improves due to better economic conditions, interest rates for loans remain at low levels so that provides additional support to corporate activity. The better the overall economic conditions become, the more the stimulus effect strengthens. By providing an ample supply of funds, there will be an effect of reducing any concerns companies may have about obtaining funds.
Q: However, the BOJ itself has made forecasts that the inflation rate will not reach 1 percent either in the current fiscal year or the next fiscal year. That has led to strong criticism that current monetary easing measures are insufficient. What is your view of such criticism?
A: While Japan has not pulled out of deflation, the inflation rate in the summer of 2009 was a negative 2.4 percent, but the negative rate has become smaller ever since. For fiscal 2011, the rate was zero percent. In fiscal 2013, it will move above 0.5 percent, so we believe there is a good possibility of the rate reaching 1 percent in the not-too-distant future.
Japan's monetary environment is the most relaxed of advanced nations. While the average interest rate for loans by banks in Japan is 1.1 percent, the average is 3.4 percent in the United States. If we look at the actual interest rates by also taking into account expected consumer prices, the rates in Japan are similar to those in the United States or somewhat lower.
Q: While that may be the case with interest rates, there is also the argument that the money supply is smaller than for the central banks of other Western economies.
A: We plan to purchase up to 24 trillion yen ($300 billion) in financial assets from financial institutions by June 2013. We are currently purchasing an extremely large amount of 3.9 trillion yen a month in long-term government bonds, or 47 trillion yen over the course of a year.
The monetary easing measures begun by the central banks of Western nations after the collapse of U.S. investment bank Lehman Brothers in the autumn of 2008 had been implemented by the BOJ from much earlier, so there may be a sense of everyone becoming accustomed to such measures.
Looking at the ratio of the central bank's money supply to nominal gross domestic product, Japan has the highest level compared to other Western nations.
What is currently happening in all advanced economies is the phenomenon of financial institutions leaving funds supplied by the central bank back in the central bank. Because there are no costs involved with zero interest rates, financial institutions are simply accumulating the money.
Under such conditions, talking about volume has no effect at all. It is inappropriate to measure the degree of monetary easing by volume and what is important is the interest rate levels from a long-term perspective.
Q: Does that mean that further monetary easing measures will require more careful decisions?
A: We will be increasing purchases of assets until June 2013; in other words we will be strengthening our monetary easing measures.
If we needlessly sharply increased our purchases, that could trigger an unexpected development in the financial market.
We want to calmly and seriously confirm the effects of the monetary easing measures that we have decided on.
Q: I want to ask you a question about the relationship between the BOJ and politicians. What are your thoughts on the view in the market that the recent series of monetary easing measures were due to caving in to political pressure calling for such measures?
A: It is only natural that there are various opinions, not only in the political world.
If the BOJ conducted policy in line with opinions calling for monetary easing measures, some people would say, "It caved in to political pressure."
If we took contrary action, there would be comments about a lack of consensus on policy views.
In either case, criticism would arise.
The principle for action by a central bank is to humbly listen to various views and to make policy decisions on the sole point of seeking stability in the economy and prices from a long-term perspective.
We have made our decisions based on the responsibility of the BOJ, and there is never a case of making a decision based on factors other than economic ones.
Q: What is your view about calls from some within the ruling and opposition parties to revise the BOJ Law to give the central government the authority to dismiss a BOJ governor who does not listen to what they want?
A: It is an established way of thinking around the world, based on many bitter lessons from history, that to bring about stability in the economic and financial sectors an independent central bank is indispensable because there is a need to conduct monetary policy over the long term by a neutral and specialized organization.
While I will refrain from a specific comment, the BOJ Law is the fundamental law on Japan's economic and financial sectors. If discussions are to be held on revising that law, I believe it will be important that sufficient time is spent on careful consideration and that such discussions are based on the established way of thinking globally about the independence of central banks.
Q: Although deliberations have begun in the Diet on a bill raising the consumption tax rate, there is no sign of when, or if, it will pass. Under such circumstances, is there not an element of unexpectedly high expectations for monetary policy?
A: Without confidence in the fiscal condition, there will be damage to stability of prices and the financial system. If there is the belief the fiscal condition cannot be sustained, government bonds will be sold off and financial institutions that hold large amounts of such bonds will suffer major losses. If that should happen, it will become more difficult to make loans and negative effects will emerge in the actual economy.
At such a time, if the central bank continued to provide money by buying up government bonds without limit, it would lead to uncontrollable inflation. That is a lesson from history. In other words, the sustainability of the fiscal condition is what fundamentally supports the stability of the currency.
Q: Are you saying that depending on what happens to the legislation to raise the consumption tax rate there could be a major effect on the markets?
A: I will not respond to hypothetical questions. However, I believe it is the responsibility of the central bank governor to clearly state the importance of maintaining the sustainability of the fiscal condition.
Q: Although the BOJ has established a rule of only possessing government bonds at the level of the volume of bank notes in circulation, forecasts call for exceeding that level by the end of the year. Does that not mean that in the end the BOJ is supporting the loans of the government?
A: The BOJ's policy of not conducting fiscal finance has been made clear. As one measure for that policy, the government bonds acquired through the "fund" that was established as part of a package of monetary easing measures in the fall of 2010 are administered in a different account so that the checking function of the market can operate.
Because the rule about bank note volume was something the BOJ itself established, there are some people who say that it can purchase as many government bonds as it wants. However, the central bank can only purchase government bonds to the extent that the public trusts and accepts the value of bank notes. Conversely, if the public does not have trust in the value of government bonds, the value of bank notes will also be lost. That is the danger held in a nation's currency.
The price of government bonds is stable now because investors believe Japan has the will and ability to rebuild its fiscal condition. It will be extremely important to began work to restore fiscal health while that confidence is maintained.
Q: In the Greek parliamentary elections, the parties in the ruling coalition that promised fiscal austerity were defeated, and there are concerns about a re-emergence of a European debt crisis. What is your forecast for the future of the global economy?
A: While I do not know how the political situation in Greece will turn out, I believe there has been a reduction in the risk of a major worsening of the European debt crisis that had heightened after last summer.
However, the fundamental issues held by Europe have not been resolved, and considerable time will be needed to overcome those problems.
In the United States, as well, while the corporate sector is doing well, considerable time will again be needed for full-fledged economic recovery since adjustments in the balance sheets of households that have large home loans have not totally come to an end.
Q: Under such circumstances, what will be needed for the Japanese economy to grow?
A: The BOJ will fulfill its responsibilities through monetary easing measures.
On the other hand, there are also issues that cannot be resolved through monetary policy.
Japan's growth rate has gradually decreased due to a sudden aging of society and a reduction in the population.
The root of the problem does not lie in the aging of society and the population decrease per se, but the delay in responding to such changes.
Over the past 10 years, the population ratio of those aged 65 and above has risen 6 percentage points, from 17 percent to 23 percent. However, the ratio of medical expenditures to GDP has only increased by 2 percentage points, from 6 percent to 8 percent.
In sectors where latent demand has increased in line with the aging of society, there are consumers willing to pay higher prices. On the other hand, ceaseless competition to reduce prices and costs has also emerged among existing products.
The process of moving out of deflation involves reducing the size of the "red ocean," where competition continues over a limited pie, and increasing the "blue ocean," which represents new markets.
Q: What should the government do toward that purpose?
A: There will be a need for a value set that allows for revitalization of the economy as well as drastic reform of regulations and systems in order to respond to new demand.
Moreover, in order to bring in foreign demand, there will be a need for efforts to make Japan a more open nation.
A road will open up as long as there is the will to do so.
While the central bank is alleviating the pain through monetary easing measures, there will be a need to fully face and tackle such issues.
To overcome deflation, there will be a need for both support from the monetary side as well as measures to strengthen economic growth capabilities.
(The interview was conducted by Satoru Takada, economic news editor at the Tokyo Head Office of The Asahi Shimbun.)
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