New BoJ Governor: Actions Will Speak Louder Than Words


The traditional sport of governor watching will take a new turn this week with Toshihiko Fukui taking over as governor of the Bank of Japan on Thursday. Commentators are already hanging on his every word looking, almost hope against hope, for some sign of change. My own view is we will have to wait: to wait and see what lies behind the words, and to wait and see how events yet to unfold may affect BoJ policy:

Toshihiko Fukui, who takes over as governor of the Bank of Japan on Thursday, signalled that he is prepared to adopt a more aggressive monetary policy, though he said the central bank could not tackle deflation alone.

In confident testimony before parliament on Tuesday Mr Fukui said the BoJ would consider broadening the range of assets it buys, comments taken by analysts to refer to the possible purchase of property-backed securities or exchange-traded funds, a proxy for the stock market.Mr Fukui also said he would look favourably on requests from politicians for the BoJ to raise the Y2,000bn limit on the amount of shares it can buy from commercial banks. The BoJ broke a taboo last September when it said it would purchase shares from banks, but Masaru Hayami, who steps down as governor on Wednesday has been openly nervous about the effect this could have on his institution's credibility.

On the controversial topic of whether the BoJ should set an inflation target, Mr Fukui was less dismissive of the idea than Mr Hayami, though he said it would be foolhardy to set such a target without making clear how it was to be achieved. "I think inflation targeting can be an important policy tool for a central bank," he said. "I still need to debate with the BoJ policy board members whether the conditions are in place for such a policy."
Source: Financial Times
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Why All the Fuss About Deflation

Deflation is a generalised and sustained fall in prices, with the emphasis on generalised and sustained. At any given time, especially in a low-inflation economy like that of our recent times, prices of some goods and services will be falling. Price declines in a specific sector may occur because productivity is rising and costs are falling more quickly in that sector than elsewhere or because the demand for the output of that sector is weak relative to the demand for other goods and services. Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation. Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines.


The above more-or-less is the now commonly accepted definition of deflation. However worrying about deflation is one thing (all thinking economists are now worried about it). Knowing why it is happening, and having something useful to say about what to do about it is another. We can all get interest rates down to the zero limit, and then start dropping our currencies 1930's style - but will it work, or will we only succeed in going round in circles?

Even while there is a growing consensus that the problem of deflation is real, my feeling is we are quite short on analysis. This was also my initial impression when I read the writings of two deflation stalwarts: Paul Krugman and Steven Roach . Importantissimo as their work is in drawing attention to the problem, too much weight in my view has been placed on the debt deflationary dynamics of the burst bubble, and not enough attention has been paid to getting to grips with why this impact has been so deep, and why it is happening now?


Why, for example, is Japan so ill? Certainly we have the boom-bust cycle story (and thanks a lot to Stephen Roach and Larry Summers for this), but are things really so unstable that you cross over a little white line and bingo, you're stuck. This, incidentally, cuts across all those arguments to the effect that we've actually got better at handling economic and financial problems.And why is today's Japan deflation of the chronic, slow-burn variety, which is very different from the dramatic and acute deflation of the 1930's. Again what is the significance for policy of this difference?


My question then is, is there something more important going off? I personally think so: I tend to use the expression 'phase transition' - or regime switch - to describe this move from an inflationary to a deflationary environment, but it's only a metaphor.


So far, I've come up with three candidates:


Firstly the secular decline in the unit price of INFORMATION (ie not just IT equipment, but eg human genome string etc, for more on this see Kurzweil's exponential over exponential, or law of accelerating returns - another thing some people just don't seem to get).


Secondly the changing demography of the developed countries: aging, changing support ratios, changing patterns of saving and consumption etc. Jeffrey Williamson and Angus Deaton, for example, have some interesting material on the growth of the so called Asian tigers that makes very interesting reading here.


Thirdly the changing structure of international production through globalisation, and in particular the entry of China into the WTO. Again Williamson and O'Rourke show how the opening of the New World changed structurally the European economies and facilitated industrial growth. It is only reasonable to expect that the take-off of China and then India will have similarly dramatic consequences in the twenty first century. These three pointers are only a start, my point of departure for an ongoing investigation. I have set up a page on my website and it is my attention to use this page to take this analysis further, and to continue digging until in Wittgenstein's famous phrase, my spade is turned. Anyone else who's interested is welcome to join me there, and mail me if you have anything interesting to contribute.
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Effects of Information Technology and Aging Work Force on Labor Demand and Technological Progress in Japanese Industries: 1980- 1998
Kiyohiko G. Nishimura, Kazunori Minetaki, Masato Shirai, Futoshi Kurokawa

This paper raises many very important issues relating to the continuing economic crisis in Japan. In particular insofar as it relates to questions concerning the impact of new technologies on an ageing society. The report has mixed conclusions. It fails to clearly establish robust relations between IT introduction and productivity. It does however claim that information technology development in the 1990s has had a negative impact on one of the past strengths of the Japanese economy: productivity increases achieved through high-education workers' learning by doing. This result will need further examination, but it does sound a warning, as much for Germany as for Japan. The only serious hope for sustained economic growth in a society with a declining labour force and declining participation rates comes through extracting an increasing productivity component from those who are working. If new technologies, and new forms of work have the consequence of reducing the value to be attributed to experience over initiative and adaptability, then the winds of creative destruction could prove devastating for those societies whose standards of life rest on accumulated stocks of wisdom and expertise.


Abstract: The purpose of this paper is two-fold. First, we examine the direction and the magnitude of substitutability or complementarity between information- and communication-related capital stock and various labor inputs to know about differential impacts of information and com-munication technology on labor demand. In this way, we can obtain information about what segments of workers information and communication technology can effectively substitute for.


Second, we estimate contribution of information and communication-related capital stock and various labor inputs on the value-added growth of the Japanese economy in the recent turbulent era (1980s and 1990s) and explore factors determining technological progress. In particular, we investigate whether rapid accumulation of information-related capital stock has a positive effect on technological progress, examining IT externality. We also discern the effect of compositional changes in labor inputs on technological progress examining the inflexibility issue and IT-induced technological obsolescence issue.


Three remarkable facts emerge from our result with respect to substitutability- complementarity issues. First, IT capital stocks are shown to be significant substitutes for young workers with a low education level, whereas old workers with a low education level are consistently quasi-fixed in all industries under investigation. Second, IT capital stocks have complementary relationship with workers with a high education level in many industries. Third, workers with a high education level and those with a low education level are substitutes. These all suggest that IT investment and human capital accumulation are of utmost importance to overcome possible shortage (in relative terms) of young workers with a low education level caused by rapidly aging population.


As for IT externality, we find at first positive correlation between IT stocks and technological progress in manufacturing, suggesting a strong externality effect of IT capital stocks. In the first glance it is very promising, since this suggests that this IT externality can be used for boosting productivity growth. However, the correlation is not robust. First, if non-manufacturing industries are included, the correlation vanishes. Second, if "Electrical Machinery" is excluded from the sample of manufacturing, the correlation also vanishes. Thus, we fail to discern clear-cut evidence for IT externality. Thus, the proposition that IT "revolution"can pop up productivity growth and can counter the pressure of aging population is not supported by our data, although investment in IT-producing industries is surely an important driving force for economic growth through substitution effects. As for the effect of labor force composition on the rate of technological progress, the results do not support that the "inflexible old worker" hypothesis of productivity slowdown. There is no correlation between the rate of technological progress and the ratio of old workers with low education in the total labor inputs.


However, the results suggest that information technology development in the 1990s has a negative impact on the past strength of the Japanese economy: productivity increase through high-education workers' learning by doing. In manufacturing industries where Japan has been strong, the rate of technological progress in the 1980s has positive (though weak) correlation with "maturing" high-education labor force. That is, the ratio of old well-educated workers in the total labor inputs has a positive (though weak) effect on technological progress. This suggests that the increased average skill among well-educated workers due to longer experience has a positive effect to improve productivity. However, the relationship changes significantly in the 1990s, and we have rather negative relationship. The nature of technological progress apparently changed adversely.
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To Monetise or Not to Monetise, That is not the Question

Curious how almost everyone who's anyone in New York or Washington thinks that the Japanese problem has a monetary solution, while almost everyone who's anyone in Tokyo disagrees. This time it's the turn of Morgan Stanley's Robert Alan Feldman.

Is it too late for Japan? The monetization is now complete along the yield curve. European investors ....worry that Germany might be the next Japan, or that somewhere else might be the next Japan. In particular, criticism has been targeted at the Fed and ECB for not moving aggressively enough in the face of deflation potential. Japan is cited as the example of what not to do, for example, in a paper by the Federal Reserve (�Preventing Deflation: Lessons from Japan�s Experience in the 1990s,� by Ahearne et al., June 2002). Although I agree that Japan has provided some examples of what other countries should not do (just as have European and North American economies at times), the contention that monetary policy was the key failure is, in my view, absurd. Rather, the key omission was an aggressive approach to structural reform in both financial and industrial sectors.

So we get back to the debate on what monetary policy should do. For those who think that ending deflation simply means lowering rates a lot and/or printing a lot of money, Japan�s experience should toll a warning bell. Base money is up by 80% since 1997, while deflation has continued. Even monetarists in Japan now agree that the collapse of money velocity cannot stop without structural reform. Moreover, the Weimar experience suggests that rapid money printing will not end the troubles of the Japanese economy. Even in less dramatic contexts, no one has ever argued that high inflation improves resource allocation -- even if it removes bank debt at the expense of creditors. On the contrary, capital flight is the natural result of such an approach, in the wake of which both confidence and real investment collapse.

I agree with my colleagues that it is necessary for the ECB and the Fed to move aggressively, in order to prevent deflation. Where my approach differs is on the question of whether monetary aggressiveness is sufficient. Easy money was NOT sufficient for Japan to avoid deflation. Structural policies were necessary too. In my view, the real lesson from Japan will be learned only when both Europe and the United States focus on the heavy, political issues of dealing with structural impediments to resource re-allocation in their own economies.
Source: Morgan Stanley Global Economic Forum
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