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Monday, March 3, 2003
Unorthodox likely to be deprived of death wish
By NORIKO HAMA
So now we know. After much speculation, leaking and hearsay, the next governor of the Bank of Japan has been named. Toshihiko Fukui it is, to the surprise and dismay of many it seems, judging by immediate media reactions here and elsewhere.
The dismayed are of the view that under the governorship of Mr. Fukui, unorthodox monetary policy does not stand a chance. That is likely to be true. And that is surely not such a bad thing.
If anything, Japanese monetary policy has been suffering under the pressure to be unorthodox for far too long. That is to say, since the inception of the "zero-interest-rate" policy. Unorthodoxy is all very well as a one-off measure to shock the patient out of paralysis. But keep the shock therapy on for too long and it loses its potency. Not only that, it starts to defeat its purpose by producing side effects that distort the economy's basic functions.
Different arms of the policymaking machinery ought not bicker, critics say. That may well be. It certainly does not promote efficiency. Yet policy and government acting efficiently in a uniform and uncontested direction can be chilling to an economy.
It is not just monetary policy that has been locked in an unorthodox mode. Fiscal policy ceased functioning with orthodox flexibility in this country long ago. Far from playing the role of stabilizer throughout the course of business cycles, counteracting excesses, it has acted procyclically and has long been one of the major hindrances to economic growth.
Unorthodoxy tends to breed unorthodoxy. One stark result of this has been the phenomenon of negative nominal interest rates in the money markets. Japanese banks are reportedly being obliged to swap yen holdings for dollars at subpar rates because of their general loss of credibility. Having thus acquired yen on the cheap, foreign banks are willing to lend money for nothing, or even at a discount, so long as the margin of that discount is smaller than the one originally extracted from their Japanese counterparts.
So people are now paying other people to borrow from them. This is like Shylock lending money gratis, or with a cash incentive (or even a pound of his own flesh) thrown in to encourage them. This is bizarre. This is unorthodox. That it should be happening ought to delight the inflation targeters, given that subsidizing people to borrow and penalizing them for saving has very much been on their agenda.
But there is nothing more dangerous than having your wishes granted. Lovers of eerie tales who have read that masterpiece of horror -- "The Monkey's Paw" -- would know. A married couple inherits a magical monkey's paw, which grants you three wishes, from a friend. They wish for a sum of money, which they immediately receive in compensation for the loss of their treasured son in a bloody workplace accident. They wish their son back to life. He comes back in all his mangled, bloody and decaying glory. Then they wish their son dead again, thanking heaven they still had the third wish as an option.
What is true in ghostly tales is also true in the world of economics. For subsidized borrowing has not led to the borrow-and-spend cycle that people had hoped for. The borrowing just keeps generating yet more borrowing within that closed circuit of absurdity. As well it might, since stepping out of that cycle to invest and spend in orthodox ways would incur risk, whereas remaining in that world guarantees you the prize of negative nominal interest rates. Unorthodox wish makers would do well to read more ghost stories.
Noriko Hama is an economist and a professor at Doshisha University School of Management.