Hi Jon, WOW. .001% interest on savings accounts in Japan. These are unbelievably low rates.
Here's a great article on exiting BOJ Governor Nobuyuki Nakahara, who's been ahead of the curve in suggesting monetary policy shifts to prod Japan out of it's economic morass.
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A Rare Voice of Dissent
By MARSHALL GITTLER
Japan is a country where great emphasis is placed on group harmony, where children are taught to fit in from the time they are in nursery school. There is even a popular Japanese saying -- "the nail that sticks out gets hammered down" -- warning against the consequences of dissent.
That makes the track record of Nobuyuki Nakahara all the more remarkable. On Friday, Mr. Nakahara finished his four-year term as a rare voice of dissent on the Bank of Japan's policy board. Throughout those four years he was consistently judged wrong by his peers, and yet he was just as consistently vindicated by subsequent events.
Of the 70 policy board meetings Mr. Nakahara attended up to this past Feb. 8, he voted against Bank of Japan Governor Masaru Hayami's proposals on 56 occasions, or 80% of the time. He further defied the majority view by putting forward 58 of his own proposals, none of which gathered even a single vote from any of the other board members. (There were a total of four abstentions on his proposals.)
From the day he joined the nine-member policy board on April 1, 1998, Mr. Nakahara, a former president and honorary chairman of oil refiner Tonen Corp., has been more pessimistic -- he says "realistic" -- than his fellow members. Believing that Japan is still suffering from "the three excesses" -- an oversupply of borrowing, capital investment and labor -- left behind by the bubble economy of the 1980s, he has consistently argued that the bank should take preemptive action to prevent the economic situation worsening still further.
As Milton Friedman said recently in an interview with Nikkei Business magazine, just because Mr. Nakahara was in the minority does not mean he was wrong. On the contrary, in many cases he was just early. Time and time again, proposals that were initially rejected by eight votes to one were subsequently adopted months or even years later.
Throughout 1998, Mr. Nakahara recommended cuts in the overnight lending rate that were initially voted down, only to be subsequently accepted. For instance, on Nov. 27, he proposed reducing the rate to 0.15% and maintaining it there until the inflation rate reached zero. The rate was lowered to that level on Feb. 12, 1999, although it took another two years before, on March 19, 2001, the bank formally adopted the idea of pledging to keep policy unchanged until deflation ended.
Mr. Nakahara then switched to calling for an increase in the reserves of financial institutions held by the Bank of Japan in order to boost money supply growth. But although he first put forward this suggestion on Feb. 22, 1999, it again took two years before it was finally implemented on March 19, 2001.
Mr. Nakahara's record of being proved right continued into his final months on the board. On Feb. 8, 2002, he recommended increasing the bank's monthly purchases of bonds in the open market to one trillion yen from 800 million yen -- a proposal adopted by the board at its following meeting. At the same time he also recommended increasing financial institutions' reserves to around 18 trillion yen -- they hit 18.2 trillion on March 20. In every single case, the proposals that were eventually implemented received not a single vote from other board members when Mr. Nakahara initially put them forward.
Not all of Mr. Nakahara's arguments won over his colleagues. For example, he has consistently opposed involving the central bank in corporate financing, starting with the November 1998 decision to lend to banks using corporate bonds as collateral. Most recently he opposed the idea of adding asset-backed commercial paper to these operations, but the policy board went ahead and did it anyway in December last year.
Bank officials say that they welcomed his dissent, as it added credibility to the policy board's discussions. However, Mr. Nakahara's criticism of the board's decisions initially attracted criticism from outside the bank for making these disagreements public and violating the principle of collective responsibility. His response to this accusation is characteristically blunt: "I think that's crazy."
Instead the former central banker advocates individual responsibility, a concept rarely embraced in Japan , where it is often impossible to find out which politician or public official took key decisions. While former U.S. President Harry Truman had a sign on his desk reading "The Buck Stops Here," in Japan the buck neither stops nor even gets passed so much as just quietly slips from view.
Mr. Nakahara derides what he refers to as "group think," where everyone simply goes along with the rest, as one of the main problems in Japan . "We have seen very rapid action by the Fed to lower interest rates," he noted wistfully. "That would not have happened here," due to the central bank's central goal of institutional self-preservation. And he points approvingly to the example of Britain, where members of the Bank of England's policy board are summoned individually before a parliamentary select committee to explain why they voted the way they did.
To fight group think, Mr. Nakahara argues that Japanese needs to be taught to think on their own terms and not be afraid to disagree with others, even if that is at odds with the traditional aim of the nation's education system. He dismisses group think as "comfortable and easy," whereas being alone requires "hard work and immense physical and intellectual stamina." "My actions have been based on the belief that having accepted a political appointment with a guarantee of independent status, I should go on making my proposals to properly perform my duty as a member of the board," he adds.
And what of the future? Surprisingly, the famously gloomy member of the bank's policy board is actually quite sanguine about Japan's economic prospects. He notes that the effects of the bubble in stock and land prices have now more or less unwound. The only major overhang left is in the lending market, but even there, the present rate of write-offs means another two years should be enough to bring lending back to where it was before the bubble era began. Then, with the banks in a position to start lending again, the economy can enter a period of healthy growth.
Mr. Nakahara stresses that it is essential that the central bank continue to support the economy during this period by maintaining its current monetary regime of quantitative easing, in which the central bank tries to influence the economy through the amount of money it supplies to the banking system. But he adds with a laugh, "I don't know if they will, now that I'm leaving."
It also remains to be seen whether his most recent ideas will win acceptance. But he claims that his proposal that the central bank should buy foreign bonds to inject funds into the banking system is "almost a foregone conclusion." And he continues to recommend that the bank adopt inflation targeting, although only time will tell whether this too will eventually become the majority view.
As for Mr. Nakahara himself, he has no plans to retire to a life of fishing. There is even a rumor going around that the government will offer him the position of governor of the Bank of Japan when Mr. Hayami retires. But Mr. Nakahara laughs when the idea is broached. "I've served the country enough," he says, adding that his period on the board was one of the most strenuous of his working career.
Mr. Gittler is Japan strategist and head of the Asian currency and fixed income strategy group for Bank of America.
Updated April 2, 2002
online.wsj.com |
