Asia Times: ANALYSIS: Professor Summers teaching Japan a lesson



	September 18, 1999	atimes.com

Editorials

ANALYSIS: Professor Summers teaching Japan a lesson
By Uwe Parpart

Below a Nikkei 225 Tokyo Stock Exchange average of 16,000, just rescued Japanese banks will once again be in deep trouble. That's the point at which they would have to recognize unrealized losses on their stock portfolios with serious consequences for capital adequacy ratios.

Meanwhile, US Treasury Secretary Larry Summers is steadfastly refusing to help the central Bank of Japan in its interventions to stem the rise of the yen which is now trading at 105 to the dollar, with a good deal more upside as the second-quarter US current account deficit soared to $81 billion from $69 billion in the January - March period. Larry reckons that the higher yen will hit the TSE hard (as indeed it did in the past few days). In fact, say Washington insiders, he counts on it as the one truly persuasive item capable of getting the BOJ to further relax monetary policy. The last thing Japanese financial authorities want to see at this point is renewed banking system instability.

The basic reason for Summers' persistent non-interventionism, his professed strong dollar policy notwithstanding, is his belief that Japan is still not doing enough to stimulate domestic demand. And like MIT economist Paul Krugman who set out the argument in academic terms in an early August memorandum, ''Dollar Crisis?'' (see his website), Summers believes that quantitative easing (printing a lot more yen and getting them circulated) is the most effective way of doing that. A related reason for not extending a helping hand to the BOJ is that he continues to harbor suspicions that Japan wants to export itself out of trouble.

So, an ideal Japan a la Summers/Krugman would have a high yen, ultra-low short-term interest rates, low long-term rates, and lots more money in circulation.

The latter requirement, though pushed for ad nauseam by one member of the BOJ's policy board, runs smack into the stiffest of opposition from still inflation-phobia troubled BOJ governor Masaru Hayami. He has time and again rejected utilizing any one of the three main policy tools available to the central bank to effect quantitative easing: he will not leave the added yen quantities put into the market by exchange rate intervention unsterilized; he will not consent to increased BOJ purchases of government bonds in the secondary market; and he is horrified at the idea of outright BOJ underwriting of new bond issues. Indeed, he has threatened to resign if the government were to attempt to force him into any one of those courses of action and undermine the bank's independence.

But that appears to be precisely what the government is plannning to do. As Taichi Sakaiya, head of the Economic Planning Agency, said earlier this week, the cabinet will discuss ''strong measures'' to stop the yen strengthening, ''including monetary policy as one aspect of our economic policy''. The battle appears to have been joined.

Hayami motivates his refusal to go further in the direction of monetary policy easing by saying that only structural reform can get the Japanese economy back on the right track. In a July 27 speech (see BOJ website) he put it as follows:

''Despite several economic stimulus measures from both the monetary and fiscal side, the response of the economy has been generally slow and we have yet to confirm any clear revival of economic dynamism led by private demand. Taking into account the weakness of private demand over the past 10 years, it is perhaps natural to think that there might be something 'structural' which has contained economic dynamism. If this is the case, it is difficult to expect a long-lasting recovery, if any, based SOLELY [our emphasis] on macroeconomic stimulus measures. Hence, to restore vitality to the Japanese economy in the medium term, painstaking efforts must be made to resolve each structural problem so as to enable the nation's economic potential to fully blossom.''

Well, Mr Governor, we can hear Larry Summers replying, no one says ''solely''. No one, least of all the US Treasury, would want to discourage reform. All we are saying is, give quantitative easing a chance. Summers wouldn't, but we will add: Too much is at stake for the world economy for the BOJ NOT to give further easing a try as a way of getting Japan out of its liquidity trap. If Hayami wants to resign over that for ill-founded fears of inflation, then so be it.