何故、日銀法改正が必要なのか(2001.9.13) (外国特派員協会での講演)

Why do we propose BOJ law revision?

It is my great honour to be here and have an opportunity to speak before you, distinguished foreign correspondents.

I have organized a group in LDP to study a bill to revise the Bank of Japan law with aiming to introduce a price stability or an inflation target policy in Japan.

The basic reasoning for proposing such a bill is as follows ;
(1)
Japanese economy, the second largest economy in the world, is now suffering from persistent deflation, mounting bankruptcies and falling industrial output.

On the other hand, the Prime Minister Junichiro Koizumi called for drastic structural reform on all fronts.

Although I strongly support Koizumi reform, I believe one important necessary condition should be met before it, that is, we should get rid of deflation first.

In 1930, Hamaguchi Cabinet forced structural changes under deflation with the outcome of disastrous chaos.

In deflation, the consumers postpone spending with an expectation of more price declines, and the corporations shrink from investment with a fear of their products to be sold at cheaper prices.

Will you take a look at Figure 1?

S-I=G+C
SAVING
SURPLUS
(28%)
INVESTMENT

(19%)

BUDGET
DEFICIT
(7%)
CURRENT
ACCOUNT
(2%)

Japanese economy has at present excessive saving as much as 9% of GDP, of which 7% is absorbed by the budget deficit and 2% by the current account surplus.

Koizumi reform will aim to curtail the budget deficit on the right hand side of the equation. Without dramatic measures taken to extinguish deflation, there will be no change on the left side. As a result, the current account should increase in order to maintain the equilibrium. How can this occur? Probably by stopping the imports under the collapse of Japanese economy, and partly by increased exports under the weakened yen.

This is the worst scenario we can foresee at this moment.

(2)
Then, how can we stop deflation? Since both inflation and deflation are monetary phenomena, the Bank of Japan can only solve these problems. Deflation occurs when the quantity of money falls short of that of commodities. The Bank of Japan should increase the monetary base which the BOJ can control directly when deflation is under way.

Hence I do not like hyper inflation either, I propose an inflation target between 2% and 4% of CPI in 2 years.

The actual measures taken to attain that target will totally be up to the BOJ, appreciating the independence of the central bank.

BOJ people criticize us, saying that there is no demand for credit. Wherever I hear this comment, I doubt whether they understand or recognize what their mission is. The credit demand is a function of capital cost. The simple capital cost is a real interest rate, that is, nominal interest rate minus inflation rate. In deflation, a real interest rate is quite high, say, around 3.5% to 4% now, higher than the USA. The BOJ’s mission should decrease this financial cost at any time.

Since our banking sector is under bad-debt-plague, a traditional transmission channel through bank lending has been weakened. However, a new mechanism through asset market will take place.

Our simulation shows in 2 or 3 months after the increase of the monetary base, the stock prices will pick up and in 4 to 6 months later, machine orders will rise and ignite private capital investments.

Figure 2 tells even in the past the increase of the monetary base moved up the stock prices quickly and then after a while GDP followed.

(3)
This inflation targeting will also contribute to enhancing transparency of the BOJ policies and clarifying its responsibility on the results. An important component of Koizumi reform is the establishment of the evaluation system of public policies, of course, the BOJ is not an exception.

This is another important merit of adopting an inflation targeting.

(4)
As shown in page 3, my draft has two major points.

The one is to introduce an inflation targeting.

The other is to strengthen the harmonization of the BOJ policies with the government policies.

Some members of the group such as Mr. Masuzoe insist to include a new article to give the power to the Prime Minister to dismiss the Governor of the BOJ. I am rather reluctant to this opinion, because once we start this argument, we get into the philosophical battle on the independence of the BOJ, which may hinder our urgent task of stopping deflation.

(5)
We have now 56 members in our group. We will resume our meeting from next week. We have scheduled to invite Mr. Richard Welner on 13th, Mr. Takuro Morinaga on 20th, and someone from the BOJ, hopefully vice-Governor Fujiwara and Professor Takatoshi ITO on 27th. We plan to complete our proposal by early October and present it to the Prime Minister Koizumi, and LDP top leaders. I hope they will accept our proposal and agree to present a legislation in the coming Diet session. If they refuse it, I am afraid we have to prepare for the crash of 2001 in Japan in the coming months.

Thank you very much for listening. I am happy to answer questions as much as time allows.