Japan's choices: 'Crash landing, hard landing'
Japanese economist urges bold action to counter too timid moves: 'Soft landing not possible'
Jacqueline Thorpe -- Financial Post
When Mitsuhiro Fukao joined the Bank of Japan (BOJ) as a fresh-faced graduate in 1974, Japan's economy was just a few years away from an expansion that would make it the envy of the world, and inflation was hurtling along at 30%.
When he left the central bank in 1997, after looking after its statistical affairs, Japan's economy was in a mess. And instead of inflation, the country is wrestling with deflation of 1.5% to 2%.
Dr. Fukao, older, wiser and with several years abroad under his belt, now says nothing short of a massive dose government intervention in the economy -- including the buying of stocks -- can turn the ship around.
"We only have a choice between a crash landing and a hard landing," Dr. Fukao said in an interview ahead of a lecture on Japan at the Toronto Board of Trade yesterday. "A soft landing is not possible."
Dr. Fukao, professor of economics at Keio University in Japan, said the BOJ and the government has no choice but to move on from its current policy of using ultra-low interest rates and purchases of debt to stimulate demand.
With prices falling, an official discount rate as low as 0.1% translates into real rates approaching 2%, a barrier to investment for businesses faced with ever-falling revenues. What bond purchases the BOJ has made have been too late and too timid.
Instead, Dr. Fukao, who earned his PhD at the University of Michigan after he left the bank and spent time at the OECD in Paris, said the government and the BOJ should adopt a four-pronged approach.
First the BOJ should set a mild inflation target of plus or minus 1.5% for core consumer prices to indicate it wants inflation to rise.
Second it should start buying hard assets on a massive scale -- mutual funds on the Tokyo stock market and quality real estate investment trusts.
"That would push up stock prices but that's not the ultimate objective, pushing up inflation is," he said.
Third, if that doesn't work, the government should levy a tax on all government investment assets -- bonds, postal savings, life insurance and checking and cash accounts -- at a rate slightly higher than deflation rate.
The goal is to turn investment away from safe assets which are increasing in value with deflation back toward the stock market and business.
Finally, the government could use the ¥20-trillion ($239-billion) it would generate from the tax revenue to recapitalize its bankrupt banks, which he expects to be eventually nationalized anyway.
The government and the BOJ is loathe to take such bold action perhaps because they don't want to take responsibility for the results, Dr. Fukao said. As well, governments don't generally like to be seen meddling in the economy.
Dr. Fukao points out however that the U.S. government of Franklin D. Roosevelt waded heavily into the economy during the Depression in the 1930s. In addition to massive government labour programs and expansionary monetary policy, it introduced a price support system and devalued the dollar against gold.
"They experimented with everything," Dr. Fukao said.
Dr. Fukao said wading into the stock market should not be viewed as much different than buying or selling gold to manipulate inflation as governments have done in the past. The stock market is the modern day capital equivalent of gold.
However, Dr. Fukao is against the government taking on bad loans, as some have suggested and as the United States did with the Savings and Loan crisis.
The scale of the losses is so large and the central bank will eventually need to tighten rates so it will need to be able to unwind its assets quickly.
And he doesn't hold much stock in devaluing the yen so the economy can export its way out of recession. The export sector is so small that a 30% devaluation would be required to be effective and this would only put downward pressure on neighbouring currencies.
"We would simply be exporting deflation from Japan," he said. "A weak yen is necessary but that should be a side effect of an expansionary monetary policy."
The measures Dr. Fukao suggest may produce a hard landing but its preferable to the crash landing that could eventually ensue.
If the government does not take tough measures Dr. Fukao envisages an eventual run on the banks as domestic investors finally lose confidence and scurry to gold, foreign currency and real estate.
nationalpost.com |
