Japan Prepares to Say Farewell to Hayami

Central bankers are a select group. Some like Alan Greenspan, Wim Duisenberg, Eddie George become household names. Others seem more comfortable with obscurity (the is not the same thing as obscurantism which is undoubtedly Duisenbergs best known attribute). Masaru Hayami, who will complete this month his five-year term as governor at the Bank of Japan, would probably have preferred the obscurity, but Japans continuing economic plight, and its significance in the world economic order have meant that this preference was not to be respected. In particular this has been the case since during his watch at the bank Japan has been the first major economy in recent times to face a sustained battle with deflation, and as a consequence the eyes of the economic world have scrutinised every decision looking both for a way out, and for lessons for the rest of us.

Hayami took control of Japans monetary policy levers in March 1998, after his predecessor resigned following a wining-and-dining scandal involving top Bank of Japan officials. Much was expected of him, and, in the event, criticism of him has been widespread, first and foremost for the fact that he appears to have had more fear of provoking inflation than he did of permitting deflation to continue. His most notorious failure: the decision to terminate the zero interest rate policy in August 2000, right after the NASDAQ bubble burst, only to have to re-introduce it and change course yet again in March 2001. As the eyes of the world turn towards the appointment of his successor, and to whether or not he will be an 'inflation targeter', the Daily Yomiuri offers us this assessment of Hayami the central banker:

With extensive experience in both the private sector and the central bank, Hayami was expected to usher in a new era for the nation's financial guardian. But instead, Hayami failed to recognize that his key mission was to overcome deflation as he was haunted by the specter of inflation, which had troubled the nation's early postwar years. The year that preceded Hayami's accession to the governorship was plagued with financial woes for the nation, including the collapse of former giants including Yamaichi Securities Co. and Hokkaido Takushoku Bank. Yet despite the prospect of far-reaching economic fallout from such financial woes, the central bank failed to quickly respond to the unprecedented situation. It was not until September that year that the central bank reduced its benchmark short-term interest rate--the unsecured overnight call rate--to 0.25 percent. However, the effects of the rate change were minimal, and the central bank was subsequently forced to adopt a zero-interest rate policy in February 1999. From the perspective of a traditional central bank, such a move was unusual in that it had effectively given up one of its most powerful monetary policy instruments. Thereafter the Bank of Japan went on a policy zigzag, bringing an end to its zero-interest rate policy in August 2000 despite warnings concerning the nation's worsening deflation, especially after the bursting of the information technology bubble in the United States. However, the central bank's decision to hike rates was strongly criticized, and the bank reinstated its zero-interest rate policy just six months later. In March 2001, financial uncertainty again rocked the economy as companies closed their accounts for the fiscal year-end. In a last-ditch effort to overcome a deflationary downturn, the central bank changed its policy from targeting interest rates to quantitative monetary easing--a policy of raising the balance of current account deposits held by private financial institutions at the central bank.

But when the new policy failed to work, Hayami reportedly responded to growing criticism by indicating to then Prime Minister Yoshiro Mori that he wanted to resign. Central bank officials seem to have an inclination to accept a certain level of recession on the grounds that an economic contraction is an inevitable consequence of speeding up the disposal of banks' nonperforming loans and hastening structural reforms. Some top officials have openly stated that recent price falls are "good" as they allow consumers to buy quality goods cheaply. The central bank officials' lack of recognition of the problem has resulted in their failure to implement timely antideflationary measures. This has caused deflationary pressures to accelerate, a situation for which Hayami must accept responsibility. Nevertheless, in contrast to general discussion on the topic, Hayami and his experts at the central bank may not have been as timid or conservative as one might have been led to believe. Not only have their adoption of a zero-interest rate policy and quantitative easing been bold steps, but other measures such as the purchase of stocks held by banks should be applauded for having gone beyond the traditional bounds of central bank policy, such as open-market operations and lending to banks.

Yet as soon as the economy appears to be on the verge of recovery, the central bank has nipped it in the bud by reimposing a tight-money policy, a habit it seems incapable of shaking off. Market players are well aware that the central bank has no option but to continue its easy-money policy as it has been unable to devise policies to overcome deflation. The central bank's reluctance to act has resulted in the yield on the benchmark 10-year government bond falling to a record low of 0.75 percent at the end of January, indicating that the market expects deflation to continue. The central bank's maneuvering of the overnight call rate formerly acted as an alarm bell for the market. The bank would leak its rate decisions if it judged the economy was overheating, using the announcement effect to fine-tune the economy.

This jawboning of the market by the central bank indicated to market players that the Bank of Japan was keeping a close watch on the nation's financial health. But now, the bank is sending out unfavorable signals that may prolong deflation and its ultra-easy monetary policy for no good reason. If a central bank fails to devise policies to influence the market, its raison d'etre must be called into question. What about purchasing a wider range of assets as the next strategy? If the bank purchased exchange-traded funds or real estate investment trusts, it would boost land and stock prices, helping to improve the banks' balance sheets as they hold large amounts of such assets as collateral. May the new governor be reminded for the last time that deflation is the nation's economic enemy, not inflation or an asset bubble. It is hoped the new central bank chief will be both courageous and flexible in carrying out the policies to overcome such a financial foe.
Source: Daily Yomiuri
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The Economist: Giving Up on Japan?

This weeks Economist piece on Japan almost sounds demoralised and despondent. Are they coming near to throwing the towel in. The article's author doesn't even seem to believe the BoJ will be headed by a deflation targeter any more (they are probably right on this: in fact those like me with a warped sense of humour are begining to imagine the whole Nobuyuki Nakahara affair was 'leaked' to the press to derail any possibility of the candidature ever being presented). Sure, the problems sometimes have a now you see me, now you don't feel about them, but they are real enough even if last weeks official GDP figures confounded all expectations - mine and the Economists alike - by showing that the Japanese economy continued to expand in the final quarter of last year. This news, however, will not make deflation disappear, nor will it take the heat off Japan�s government, which according to the Economist now "appears to be incapable of tackling the country�s deep-seated economic problems".

GOOD news about the Japanese economy is rare these days�and surprising. Most economists had braced themselves for the news that the Japanese economy had shrunk in the final quarter of 2002. So the official figures, released on February 14th and showing that the economy expanded in the October-December quarter, caught people off guard. Growth was modest enough: just 2% at an annual rate. But it means that the economy has now grown for four quarters in succession, and that the country�s fragile recovery is not�yet�over. The figures will provide a welcome breather for the Japanese government, but one likely to be shortlived. The economy�s problems remain daunting and the new data followed hard on the heels of a further slide in business optimism. Moreover, they came just a few days after a new opinion poll showed that the popularity of the prime minister, Junichiro Koizumi, had slumped.


Tackling deflation is a matter of urgency. But even those economists for whom inflation targeting is the preferred solution accept that, by itself, ending deflation will not solve Japan�s problems. What is needed is concerted reform on several fronts�monetary, fiscal and structural. Japanese government debt now exceeds 150% of GDP (more than double the upper limit set by the European Union) and is rising fast. What to some observers seems like an endless series of fiscal-stimulus packages has had almost no economic impact, in part because of a misguided emphasis on wasteful, expensive public-sector construction projects. These have benefited the LDP�s corporate contributors more than the wider economy. Co-ordinated reform seems beyond the current political establishment, and commentators have given up talking about Japan�s last chance to change before being engulfed by a full-blown crisis. The slow speed of the economic decline has meant that the debate within Japan has lacked the sense of urgency that would be needed to overcome opposition to reform. But for Mr Koizumi himself, time might be running out. There is talk of his vulnerability in the LDP leadership election due in September and speculation that he might try to head off a challenge by calling an early general election. What that would do to improve Japan�s miserable economic prospects is far from clear.
Source: The Economist
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Two Views on the Doha Round

It is an obvious truism that how you feel about something is often a result of where you are looking from. Below I post the example of two contrasting views concerning proposed Doha round changes to agricultural tarrifs and farm subsidies, one from Japan and the other from India. Those who are opposed to globalisation in itself will doubtless find here yet more material for criticism. Those, like me, who are convinced of its potential benefits, can and should note that the process in reality is not unproblematic. India has an enormous problem of rural poverty that cannot simply be waived away overnight. It is, however, extremely encouraging to find that the need for change is accepted in principle, and that the Indian economy is becoming more and more open. The European and Japanese case is rather different, tarrifs and subsidies have been used for far too long as a means to preserve activities which often have little economic (but plenty of political) rationale. Change will come, but it is a pity that in the richer economies, where the possibility of gradual change has long existed, things were not resolved earlier. Now the process may be more painful since - on this and many other fronts - reforms will be introduced against a far less favourable economic backdrop.

Thousands of Japanese farmers rallied Saturday to stop ministers huddled at a World Trade Organization meeting in Tokyo from approving a proposal to slash tariffs. "We are going to send a clear message to the ministers that they must protect Japanese farms,'' Kazuyoshi Fujita who represents agricultural and consumer groups told a crowd of about 8,000 people gathered at a Tokyo park. "Without food, how can people live? Without rice farming, how can Japan survive?'' Delegates from the WTO and 22 member economies are meeting in Tokyo to try to hammer out an agreement on agricultural talks by the end of March, as part of the latest round of WTO global trade talks that began in Doha, Qatar in 2001. The talks Saturday focused on a proposal from former Hong Kong Trade Ambassador Stuart Harbinson, the chair of the WTO farm negotiations, to reduce tariffs by an average 60 percent in five years, reduce subsidies and raise import quotas, officials said. Farmers say Harbinson's proposal would be devastating for Japanese agriculture, which is far more expensive than American agribusiness and the rest of Asia. Japan, which imports 60 percent of its food, protects its rice farms with a 490 percent tariff on foreign rice. "We are fighting hard against the proposal because Japanese farms will be destroyed,'' 58-year-old farmer Yasuhiko Matsunaga said standing among colorful banners that said, "Rice is No. 1.''
Source: The Star Online
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The World Trade Organisation draft proposal on agriculture have come as a shot in the arm for developing countries with many of those attending the mini-ministerial in Japan terming it a small victory, and indicating that it addressed some of their long standing objections related to opening up the farm sector. The latest draft by the chairman of the WTO Committee on agriculture Stuart Harbinson proposed that the developing countries could gradually cut customs duty on agri-products over a negotiated period, and continue with other measures of state subsidy and extraordinary support. But it has also come as something of a jolt to many of the developed countries, including Japan and European Union, which have opposed any drastic reduction of farm subsidy. Delegates from developing countries, including those from India, Kenya and Nigeria said that the outcome could be viewed as a small victory for the strong stand taken by the developing countries at Doha Ministerial gathering against opening up of their agri-market without addressing the problem of the prevailing social conditions. Though India welcomed the draft modalities giving concessions on the state subsidy and special product exemption front, it indicated it would oppose the reduction in the tariff structure as proposed within a period of 10 years, official sources said. The developing countries consider the draft as an important document as it has attempted to take on board the differing views of three major trading blocks - CAIRNS, EU and the developing countries - over the contentious issue of market access in agriculture sector. The CAIRNS countries - including US, Australia, New Zealand, Malaysia, Indonesia, Brazil, Thailand and Canada - being agri-export countries, advocate free market access. Many of these countries have hidden subsidies to boost their agriculture sector. The EU, which gives huge subsidies to the agriculture sector, supports market access but does not agree to link this to a reduction in subsidy. Developing countries fear that their markets will be flooded with products from other countries, which are cheap due to massive state support, thus causing unrest and social tension among the population dependent on this for their livelihood. Explaining the Indian position, the official said 65 per cent of the Indian population was dependent on agriculture and the government views this sector as a means to eliminate rural poverty.Moreover, the total subsidy given by the government through smaller supports in electricity tariff, fertiliser prices and transportations was lower than the WTO benchmark on subsidy. Viewed in this backdrop, the draft modalities proposed by the WTO Committee on Agriculture come at an opportune time. India said that its interests in some key areas had been further protected by the proposition in the draft under the Special Product Exemption category where it could maintain its present tariff.
Source: Redif.com
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Japan Back in Reverse Gear

More bad, bad news from Japan.The economy has begun, once again, to contract. You could call it the incredible shrinking economy, were it not for the fact that humour seems to be out of place here, and that these results may give us a pointer to what's in store for the rest of us if I'm even halfway right about the root cause. Apart from the downturn, also worthy of note is the continuing decline in bank lending and the slow rate of growth in monetary supply.

Figures to be released on Friday are likely to show that the Japanese economy contracted in the December quarter, bringing to an end the shortest recovery in Japan's post-war history, a senior economic adviser to the prime minister conceded on Monday. "I am afraid that the economy is already contracting," said Haruo Shimada, professor of economics at Keio University and senior economic adviser to Junichiro Koizumi, prime minister. He said there was no sign of improvement in domestic consumption, with the only increase in demand coming from the external sector. The concession that the economy has stuttered to a halt came as figures showed last year's mini-export boom beginning to slow. Data for bank lending, also released on Monday, showed the 61st straight month of decline as financial institutions continued to shrink their lending base in an effort to shore up capital adequacy and prevent more loans from turning sour. Bank lending for January fell 4.7 per cent.

"Japan is never going to be driven too much by exports because they account for only 10 per cent of the economy," said Peter Tasker, head of Arcus Investment, a Tokyo-based hedge fund. "There's only so much you can do if the other 90 per cent of the economy is going in reverse." The current account surplus for 2002 rose 34 per cent from the previous year to Y14,248bn ($120bn, �112bn, �74bn), about 3 per cent of gross domestic product. Exports for the year rose 6 per cent thanks largely to a 13.7 per cent increase in shipments to Asia, of which almost a third were electronics goods. "Exports to Asia climbed very steeply in the first half of 2002 and have now levelled out," said Chris Walker, economist at Credit Suisse First Boston in Tokyo. Exports to the US rose just 1 per cent during the year.

Signs that the export-led recovery may be petering out came with figures for December, which showed the current account surplus shrinking 1.4 per cent year-on-year. Economists said an improvement in Japan's external performance tended to strengthen the yen, which then choked off further growth. "You had quite a sharp recovery in industrial production driven entirely by the export sector, but momentum peaked in summer and has been easing off since then," said Mr Tasker. He said there had been no collapse in economic activity since growth had never properly got going in the first place. "It's hard to collapse when you're already sprawling on the ground." The Bank of Japan also said on Monday that monetary supply in January grew at 2 per cent year-on-year, its slowest rate of increase since the end of 2000. The central bank's policy board meets on Thursday, but is unlikely to contemplate a radical change of policy before March, when a new governor is due to be appointed.
Source: Financial Times
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