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To: Haim R. Branisteanu who wrote (55222)	6/25/2000 11:30:00 AM
From: Les H	Read Replies (1) \| Respond to of 99985

Tallying blunders of 'bubble' era By Makoto Imazawa Mainichi Shimbun mainichi.co.jp The Bank of Japan recently released a report on the "bubble" economy of the late 1980s. The central bankers acknowledge their tardiness in raising the official discount rate during the bubble era and point out that their decision to stick to an easy money policy was one reason for the emergence and expansion of the bubble. Until now, the governor of the Bank of Japan had expressed remorse and made fragmentary references to the lessons to be learned from the bubble during media conferences and speeches. But this is the first time that the bank has published a systematic analysis of what occurred 10 years ago. The question is, how does the Bank of Japan plan to apply its analysis and conclusions to current problems? The central bank is now groping for a way to end its policy of near-zero interest rates, which can only be described as aberrant, in order to facilitate a return to normalcy. Needless to say, the financial authorities are going to be held accountable for their actions. No matter how many reports the central bank publishes, however, if it bungles its response to the current monetary challenge, its reports will amount to nothing more than pointless exercises. What lessons does the Bank of Japan admit to having learned from the policy errors of the bubble era? First, the bank points out that it is important to rebut arguments that threaten to undermine its primary mission - the maintenance of price stability and the stability of the financial system. During the bubble era, the bank's management of monetary policy was hindered by three other issues - international policy coordination, efforts to block the yen's appreciation and attempts to stimulate domestic demand in order to reduce the current account surplus. Simply put, the various meetings of the finance ministers and central bankers from the Group of Five and Group of Seven leading industrialized nations, and Japan-U.S. summit meetings had served to create a consensus for a loose monetary policy. The central bank report notes that "among the Japanese people, there arose the vague notion that interest rates are decided through consultation with concerned countries ... As soon as policy ideas that threaten to undermine the mission of the Bank of Japan began to spread, it was difficult for monetary policy to escape their influence." One lesson the central bank has learned is that it is important to explain its thinking clearly to the public. But around Kasumigaseki, the positions staked out by the central bank in its report are likely to trigger the rejoinder that the bank has put an overly attractive spin on what happened. There will be criticism that the bank left the business of jawboning politicians to the Finance Ministry and was not willing to stick its neck out. Bank officials remained ensconced in their ivory tower and issued pronouncements that sounded as if they had emanated from the mouths of economists. Others will condemn the central bank for merely scrutinizing the numbers without attempting to get a handle on what was going in the actual economy. I believe that the Bank of Japan is fully aware that most of this criticism is not off the mark. Two years ago, the Bank of Japan Law was revised in order to strengthen the independence of the central bank. The policymaking process was significantly altered. In addition to the governor and two deputy governors, six board members meet once or twice a month to decide whether to change monetary policy. Summaries of their discussions are made public one month after they occur. These reforms have improved the transparency of the policy-making process. On the other hand, independence and the duty to explain its decisions are two sides of the same coin. Since it has a greater degree of independence, the central bank's duty to explain its policies to the people is now more important than ever. The governor and board members now have to explain their thinking at various venues. Whether the Bank of Japan is carrying out its explanatory obligations fully can only be determined in the future. However, its senior officials will not be able to make persuasive arguments if they are asked to speak out only at nodal points in monetary policy, which come along once every few years. The central bank's senior officials need to practice explaining the bank's position to the public on an ongoing basis in order to become effective spokespeople for the bank. The other lesson cited in the report has to do with the importance of taking pre-emptive steps that assess and respond to emerging threats to monetary stability. In other words, the bank must assume a long-term perspective. During the bubble period, stock and land prices soared. Monetary supply grew at a rapid pace, and the rising demand for labor and high plant-utilization rates clearly indicated that the economy was overheating. With hindsight, it is clear that the statistics indicated that the economic boom would not last forever. Subsequently, stock prices and land prices took a dive, and financial institutions were saddled with a mountain of bad loans. Their inability to cover their losses gave rise to financial uncertainty and dealt the economy a major blow. Now that we have experienced a string of collapses of major banks, even economic illiterates understand the negative economic consequences of steep swings in stock and land prices. However, while stock prices were setting new records and land prices were skyrocketing, business and financial professionals could not imagine the extent of the pain that would accompany a downturn. Sixteen months have passed since the central bank implemented the near-zero interest rate policy. And nearly five years have gone by since the central bank pegged the official discount rate at 0.5 percent. Current economic conditions are a far cry from those that had emerged on the eve of the bubble in the late 1980s. At that time, the economy clearly was on a recovery path. Today, signs that a recovery is looming have begun to appear. But the two eras are distinguished primarily by abnormally low interest rates. The greater the effect of the current interest rate policy, the greater its side effects on the economy. Monetary policy is a dynamic activity that requires central bank officials to digest every kind of economic information for distillation into a single number - the interest rate. That is why Bank of Japan officials cause so much harm when they get it wrong. If they fail to apply the lessons learned from the bubble, the 1990s will have truly been a lost decade. We would like to interpret the Bank of Japan's report as a statement of its resolve not to duplicate its errors of the past.