The proposal I am referring to is the latest "initiative" being quietly cooked up by some members of the ruling Liberal Democratic party. According to reports in the Japanese press the politicians in question, who include Yoshihide Suga, deputy chairman of the LDP’s election strategy council and a close aide to prime minister Aso, have set up a working group and are quietly dusting down plans (first advocated by Nobel economist Joseph Stiglitz on a flying visit to Tokyo) for the government to introduce its own private currency - yes that's right its own currency - to run in tandem as a rival the country's already existing official one (aka the Yen) which is essentially exclusively issued by the Bank of Japan.
The plan would seem to involve the printing of some Y50,000bn ($546bn) worth of a new currency to fund government pump-priming projects and arrives at a time of rising frustration among politicians about the posture being taken by the Bank of Japan who have been notably reluctant to bow to pressure and let the yen printing presses run ever faster in a desperate attempt to stimulate the economy.
Among proposals they have on the table are Y30,000bn of the new money to fund programmes supporting new industries and infrastructure projects, including doubling the size of Tokyo’s Haneda airport. The remaining Y20,000bn would be earmarked for government purchases of stocks and real estate.
“We are facing hyper-deflation, so we need a policy to create hyper-inflation.
We have to do something to undermine the central bank and government’s
credibility or else we won’t be able to halt the yen’s rise. So, while we know
this is drastic medicine, we will do it,” said Koutaro Tamura, an upper house
Diet member who will chair the new group.
The proposals are causing all sorts of controversy in Japan. Prime Minister Taro Aso said on Monday evening that "We are not at all at the stage of considering such an idea", while Chief Cabinet Secretary Takeo Kawamura warned that if the government prints money, it could lead to inflation and weaken the yen against other major currencies. BOJ Gov. Masaaki Shirakawa was also pretty critical of the proposal, saying it could "cause great damage" to the central bank's balance sheet and monetary policy as well as market confidence in the yen.
"The plan would require very careful consideration because it could result in jumps in Japan's long-term interest rates, with market participants losing trust in the government's commitment to repaying its debts," Shirakawa said.
Of course, what may lie behind such thinking is an extremely literal reading of a very influential academic paper by IMF economist (and former Paul Krugman PhD student) Gauti Eggertsson How to Fight Deflation in a Liquidity Trap: Committing to Being Irresponsible - right down to the small print. The basic idea is that as expectations of intensifying deflation set in deeper and the economic contraction intensifies a short sharp shock of irresponsibility is needed to convince people that inflation is inevitable.
Weakening the yen, and raising market participants inflation expectations (or their fear that government will irresponsibly monetise its debt), is just what the Eggerston proposal is all about, so fears of such an outcome - as expressed above - would hardly seem to constitute objections, and while it is unlikely that the plan will get very far in the short term (rather than prodding the BoJ into more aggresive action), Japan's crisis is very severe, and getting worse by the day, so clearly they are something out of the ordinary needs to be considered.
Industrial output plunged by a record 9.6 per cent month on month in December,and the consensus opinion among economists suggests GDP may have fallen more than 3 per cent compared with the previous quarter at the end of 2008 – an annualised decline of over 12 per cent.
“From October to December the scale of negative growth [in GDP] may have been unimaginable – and we have to consider the possibility that there could be even greater decline between January and March,” Mr Momma said in a speech.
So perhaps the unimaginable in negative growth may also call for what would previously have been unimaginable policy as a response.
3 comments:
If I remember correctly, Committing to being Irresponsible was advanced in "It's baaack! Japan's Slump and the Return of the Liquidity Trap." I could imagine it might work (in the short term) if the rest of the world were being "responsible," but at present it would only be a policy to match the "irresponsibility" of others.
"I could imagine it might work (in the short term) if the rest of the world were being "responsible," but at present it would only be a policy to match the "irresponsibility" of others."
Yes, I'm inclined to agree. A kind of race to see who can be most irresponsible (and thus most convincing). Like devaluation as a way to avoid deflation, it works if you are the only one to do it, but if everyone tries to out-devalue everyone else, then you peddle very hard to stand still.
Which all seems to suggest that the present problems have no easy solution.
"including doubling the size of Tokyo’s Haneda airport"
..... in direct competition with the public utility which has invested billions (trillions?) of yen in developing Narita Airport?
Consider that Japan's capital investment has averaged about 15% of GDP, more than half again the relevant figure for the US. What has it achieved? Over the last 10 years, a net decrease in GDP (nominal figures). Average private sector returns on investment have been about one third lower than those in the US - and I am referring to manufacturing, not finance. This is a feature of Japan's economic malaise that could be fixed much quicker than the demographic problem.
Regarding the proposal for new currency, rather than Krugman, I suggest it has a historical precedent in the "Banana Money" issued in Japanese occupied territories during the war.
Discuss!
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