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Monday, March 17, 2003


Next BOJ team must sell the public a fiscal policy it can believe in

A lot has been said about the nomination of Bank of Japan Gov. Toshihiko Fukui, the events that led to the formation of his team, and the political dynamics behind that decision. Now, with his formal appointment due on Thursday, I would like to point out several tasks the central bank will need to tackle under his leadership.

Over the decades since the war, Japan has experienced various degrees of economic turbulence, ranging from the two oil crises in the 1970s to the asset-inflated bubble of the late 1980s and its collapse in the early 1990s.

For the BOJ, however, managing monetary policy has perhaps never been more difficult than it is today because the nation remains mired in deflationary pressures that emerged in the wake of a decade-long economic slump.

Experts both in Japan and overseas have come up with a variety of remedies for our deflationary ways, but there doesn't seem to be an easy answer. In fact, there is no clear worldwide consensus among economic scholars on whether any of the proposed remedies will really help a nation shake deflation, or on whether they carry the risk of plunging it into hyperinflation once those pressures have been overcome.

As long as no one can provide a clear way out of this economic dilemma, the BOJ will face criticism no matter what policy it pursues. Thus, what is required of the central bank, aside from continuing its day-to-day operations, is that it provide a convincing explanation to the public and the financial markets as to why it believes the policy option it has adopted is the best one and has the biggest chance of success.

In recent years, outsiders have found many of the BOJ's decisions, such as the lifting of the zero-interest-rate policy in 2000 and untimely comments condoning a strong yen, quite difficult to understand.

Statements by the BOJ governor have frequently caused misunderstandings -- either because the explanations behind them were insufficient or because they were just too blunt.

This has damaged public confidence in the central bank and created the impression it is reluctant to do what needs to be done, although it has in fact steadily implemented measures to increase the supply of funds to banks' current accounts and purchase shares held by financial institutions.

In this sense, the business community hopes the appointment of Mr. Fukui, who is not only well-versed in monetary policy but also has the ability to make decisions and clearly explain himself, will help win the mutual trust and understanding of both the public and the financial markets.

Frankly speaking, many of the monetary policy options left to the BOJ are "unorthodox" by conventional standards. However, the fact remains: Japan's economy is in extremely serious condition, and the BOJ and the government must work together -- and in clear agreement -- to pursue a relevant combination of monetary and fiscal policy. If share prices should fall even further, the central bank will need to explore as many policy options as possible, including the purchase of exchange-traded funds and real estate investment trusts.

Of course, structural reform of the economy -- as has been advocated by Mr. Fukui -- is also essential. But past statements by BOJ chiefs who have called for structural reforms have been taken as an indication that the central bank will not take any particular monetary steps.

However, instead of using the need for structural reforms as an "excuse," the BOJ should work hand-in-hand with the government to coordinate fiscal and monetary policy, resuscitate the industrial and financial sectors, and deregulate the economy in a constructive manner.

Yoshio Nakamura is a senior managing director of the Japan Business Federation (Nippon Keidanren).

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