2. Inconsistencies Existent in BOJ Financial Policy
Interviewer:
I 'd like to ask you about the issues which have been brought up during
the Diet sesscions. Namely, the financial policy and in particular, the
monetary policy held by the Bank of Japan. You have pointed out at the beginning
of Rep. Yamamoto's written statement on policy that the monetary policy
of the BOJ should be carried out in line with economic policy of the government.
You also pointed out that the monetary policy held by the Bank of Japan
is problematic.
I'd like to hear your opinion on this issue in detail.
Rep. Yamamoto:
In any economics textbook, monetary policy is defined as the management
of the monetary base by the control of the central bank and thereby controlling
money-supply. This is an orthodox explanation of monetary policy. However,
the Bank of Japan is considering administering a monetary policy that is
far from what is defined in the textbooks. That is, they always look at
the nominal short-term interest rate called the call rate and they do not
want to change the call rate not so much.
A low call rate is called an expansionary policy. A high call rate is
called a tight policy. The problem with this monetary policy is that it
is the nominal interest rate. Therefore, their discussions are far from
the real interest rate. If the price level (to put it more accurately, expected
price increase rate) is changed, the real interest rate could be very high
even if the nominal interest rate is low.
The substantial capital cost is high in a situation where the risk premium
is very high since the capital cost that determines actual behavior of the
corporations is defined as real interest rate plus risk premium.
In spite of this fact, the Bank of Japan is taking the position of that
the policy is expansive since the nominal interest rate is low. This has
been making the market recession more serious. Since it is very difficult
to control the rate of price increase or real interest rate, it would be
better to think about quantity or how much money in the real economy. Then,
difficult problems of price can be changed into something simpler.
In short, what I want to say is that the Bank of Japan should examine
the orthodox policy under taken by the central banks of Europe and the US,
and the Bank of Japan has not been doing this.
Interviewer:
Are there any other reasons for the lag in the timing of the lowering of
interest rate?
Rep. Yamamoto:
What the Bank of Japan is planning as a monetary policy is an equation
composed of the excess payment of financial capital subtracted from the
additional issuance of Bank of Japan notes. They take their cue from the
demand of capital through this equation. If this turns out to be positive,
they judge that it is a money tightening factor and increase the credit
of the Bank of Japan.
And if it is negative, they consider that it is a money expansionary factor
and decrease the credit of the Bank of Japan. When explaining the policy
of the Bank of Japan, they always explain it in this way. This is not a
theory. They are thinking in terms of an identical equation. In addition
to this, they do not have the concept of cost. There is no argument of what
is the policy's goal and what is the policy's means. Let me explain to you
what would happen if we use this equation.
For example, during Japan's bubble economy, real estate companies bought
one piece of land after by cash another as a tax-evasion measure. During
that time, the number of BOJ notes increased considerably. However, the
BOJ judged that the finances were restricted since the amount of money diminished
in the financial sector world, and increased the BOJ credit.
That is, the number of the Bank of Japan notes increased during the bubble
economy and in spite of the fact that there was excess money, they took
measures to increase the credit of the Bank of Japan to add to expand the
bubble further.
On the contrary, when there is an excess payment in finance, since the
equation yields negative results and therefore they consider this as a money
loosening factor and take restraining measures.
By doing this, the recession becomes more serious. They have been making
such mistakes very frequently. Since they are using the equation as a basis
for their decision to try to freeze the short-term nominal interest rate,
without hesitation they take measures that can cause abnormal fluctuations
abruptly from positive to negative. The monetary base has been overwhelmingly
negative since last December till January of this year.
So what I want to tell you is that the Bank of Japan does not have a monetary
theory. Although it is the high time for them to understand the relationship
between the monetary base and the money supply and discuss what will happen
to the interest rate level depending on which policy they implement and
what will happen to the level of income, presently, they don't have a working
model. |