Interview 　

3. Monetary Policy : a Key to Economic Recovery

Interviewer:
　On February 9th, The Financial Times pointed out with cynicism that Japan has become a world leader in the issuance of government bond, referring to the issuance of government bonds by Japan. This phenomenon occurred because Japan's government has been taking measures to emphasize a fiscal policy with the justification that it will lead to the recovery in business conditions. What in your opinion about this situation?

Representative Yamamoto:
　There is a theory in economics called the Mundel-Flemming Theory. What the theory says in short is that a fiscal expansion policy does not work effectively as measures to promote the recovery of business conditions under a floating exchange rate system.
　For if the government takes measures to expand fiscal policy such as increasing public investment, this naturally is accomplished by issuing national bonds and this in turn leads to an increase in the interest rate and increased pressures.
　Then, this leads to an inflow of capital and this in turn leads to the appreciation of the yen. That is, the exchange rate nullifies economic stimulation policies deriving from the fiscal expansion by strengthening the yen. Therefore, under the floating exchange rate system, a fiscal expansion policy does not work effectively as measures to promote the recovery of business conditions.
　When we turn our attention to monetary policy, we see that it works both ways. By loosening the money, the interest rate is lowered and investment becomes easier as well. At the same time, the exchange rate moves toward weaker.
　That is, we will enjoy two effects: a direct effect of loosening the money and an effect where the exchange rate for yen becomes lowered. Few Japanese policy makers understand that monetary policies are the only stimulus are the only stimulus measures under a floating exchange rate system.
　Most Diet member's or the Ministry of Finance officials are simple-Keynesians and are not able to see things from any viewpoint outside of the level of economics during the 70's. This is the most serious problem. This is the reason why Lawrence Summers (the U.S. deputy treasury secretary) has been able to take advantage of the situation. The United States is following the Mondel-Flemming Theory.
　The United States has taken an active stance in promoting their monetary policy and on the one hand took a sound policy for their fiscal policy.That worked effectively to facilitate their interest rate policy. On theother hand, the United States demanded that the Japanese government expand its domestic demand and market. Since Japan's primitive Keynesians do not understand the Mundel-Flemming Theory, they only undertook a financial stimlation policy. The result could have been bearable if they had adjusted their monetary policy in the direction of relaxation. However, since they only took a financial stimulation policy, particularly during the Murayama government, the result was a soar in the yen.

Interviewer:
　In the question you asked of the Minister of Finance Mr. Masayoshi Takemura (the Finance Committee, May 9th, 1995), you made a critical remark. Since the U.S. Secretary of the Treasury Robert E. Rubin are long-time professionals in the U.S. financial world, they know how to make theory work in reality. In the case of Japan, people in the financial authority should have the same level of knowledge as Mr. Summers and Mr. Rubin in order to cope with the problems we are facing. So, how many of the representatives in the Diet do you think are well versed in this matter?

Rep. Yamamoto:
　I believe the number is very low. I think there are less than 5 representatives at most who are acquainted with Mundel-Flemming Theory or monetary policy.

Interviewer:
　This is a serious situation. Are we able to cope with issues that we will face in international negotiations?

Rep. Yamamoto:
　There are many representatives who have limited fragmentary knowledge regarding theory and monetary policy. There are also some people who are well acquainted with the actual situation of the financial world on the basis of second-hand knowledge. However, there are very few who have studied these subjects theoretically and have well-developed knowledge.

Interviewer:
　Important bills regarding finance are usually drafted and summarized by you. That is, You are the actual policy maker, right?

Rep. Yamamoto:
　Never (with a laughter). However, they have been adopting policies that are based on primitive Keynesian theory and what we ended up with were deficit-covering government bonds. If we had depended on a monetary policy, our business climate would have recovered from the recession. In addition, if we had taken countermeasures against bad loans at the same time, business conditions would have sufficiently recovered to a healthy state 3 or 4 years ago.
　Since we are now finally moving in the right direction, I would like the Bank of Japan to clearly show a change in its direction. In addition, we would like this special arbitration bill to immediately pass the Diet in order to encourage banks to conform to the bill. The sooner we can carry this out, the sooner business conditions will recover.

Interviewer:
　Overseas investors or observes of Japanese politics have a strong interest in the direction of Japan's economy. In particular, they hope to see processing of the bad loans carried out as soon as possible. I 'd like to see as many representatives who have as much knowledge as you do to stimulate legislation activities. As a final word, do you have anything you want to tell the Japan Watch readers?

Rep. Yamamoto:
　Although at this moment, Japan is sadded with many problems, I believe that Japan's economy has no serious problems in the long-term range. This confidence comes from the fact that there is no other country in the world with such diligent people, such high productivity and such quality in its labor force as we do in Japan. Our country is very safe and the people of Japan follow their legal system. I don't think the world will ignore this capabilty of the Japanese.
　If the government processes the bad loans and creates sound policies based on an understanding of orthodox fiscal-monetary policy, Japan's economy will surely recover, and Japan has sufficient capability for recovery. There was a time when we were overjoyed to buy up the assets in the United States. But we know that is an illusion. Now we are at opposite ends of the issue, saying that we are at an end and indulging ourselves in pessimism. I don't think this is right. Japan has overcome various problems and has sufficient power to do so. From the long-term standpoint, Japan has no serious foreseeable problems.

Interviewer:
　What about structural reform? There are opinions that this is very difficult to carry out. What do you think?

Rep. Yamamoto:
　Obviously, This has to be carried out. I believe Japan's market is more liberal than that of the United States. There are many foreign affiliated firms entering Japan. If Japan's companies see the growth of many foreign affiliated firms after the financial big bang, Japanese companies will have to change themselves as well.
　There may be some cases where managers are taken over by individuals from a foreign affiliated firm. I believe this is good. Such cases may emerge frequently in the financial sector. However,in the manufacturing sector, Japan is still strong. This comes from a fierce competition. The entire industrial world will have to survive the competition.
　So far, the production rate has been high since the manufactureing has been the only industry to have been exposed to competition. It has been decided that the financial sector will be exposed to free competition through the financial big bang. Since this will lead to a similar pressures imposed on other service industries, they will be forced to carry out reforms as well.

interviewer: Mitsuyoshi Tsukahara 　 president@jipr.org
(Recorded on March 24th, 1999)