Editorial»
Japan : Addicted to easy money
NOV 10 - We need cooperation from the Bank of Japan and to push through with current reforms.” That is what Prime Minister Junichiro Koizumi said when he was asked about how he plans to revitalize the world’s second-biggest economy.
Long-time Japan investors and observers know that Koizumi’s statement, made last weekend, is code for “it’s up to the central bank to save us.” What else can be assumed since no major “current reforms” are afoot? There are just fuzzy promises to deregulate the economy and clean up the banking system.
Tokyo is again falling back on its old crutch and whipping boy. It is an odd thing, considering that Japanese interest rates are already at zero percent, and the Bank of Japan has gone even further to add yen to the economy.
In the government’s eyes, it seems, the Japanese central bank can never do enough to bolster growth and end deflation. Even if it set a formal target for inflation, printed yen with abandon, and bought mountains of government bonds, politicians still wouldn’t be happy.
The reason: Japan is the world’s biggest monetary junkie and it can’t kick the habit. Like most habits, it started out small. After the asset bubble burst 13 years ago, Japan experimented with what it thought were harmless fiscal stimulants. The Bank of Japan printed some yen. Since then, Japan has become a full-blown junkie, living from monetary hit to fiscal fix, and in denial of its problems.
Now the government is cooking up one last plan to go straight: Koizumi is calling for greater cooperation between the central bank and government officials charged with reforming the economy.
This won’t be easy. Japan has relied on easy money to function quarter-to-quarter, year-to-year. It has also found a powerful enabler in a central bank that has permitted the government to delay painful reforms and hide its habit from
the world.
During three recessions since 1991, Tokyo has amassed a national debt equivalent to 140 percent of annual gross domestic product, the largest in the developed world. Used to finance bridges, roads, dams and other public works projects, the borrowing helped avert deeper declines. Japan’s structural problems get worse and more costly with each passing year.
While economists urge a more holistic approach - writing off bad bank loans, deregulation and increased competition - what is needed is a serious intervention, and the Bank of Japan is the obvious candidate.
For starters, it can stop enabling a change-resistant government. If the bank is there to support the financial system with easy money, why should politicians make tough decisions? Most critics think the bank is too stingy with credit, yet its real failing is to have become a crutch for the government.
Perhaps the Bank of Japan should raise interest rates. For years, Japan has averted crises with cheap money - so cheap that many banks and companies couldn’t have survived without it. Higher rates may be the only way to wean the economy off ultra-low ones.
That is what the former central bank governor, Masaru Hayami, had in mind three years ago when he increased rates from zero to 0.25 percent. Vilified at the time, he was boldly trying to force Japan’s public and private sectors to implement structural reforms. It didn’t work. He returned rates to zero in
March 2001.
Ultra-low rates help Japan hide the true magnitude of its bad-loan problem. Companies can pretend to be sound because borrowing costs are negligible enough for them to make interest payments out of cash flows. Chief executives can be under water and survive for years, so long as they can report an operating profit, or at least hold operating losses to a minimum.
All this leaves executives with little urgency to restructure. If the central bank raised borrowing costs even a little, many companies couldn’t afford the extra interest expense. Some would go bust, and that would be tragic for the thousands of people who would lose their jobs. Other companies would be forced to restructure, however, and they would eventually become healthier.
With the Nikkei 225 stock average up by about one-third this year in dollar terms, Tokyo figures it can grow its way out of its problems. And many investors seem to be giving Japanese officials the benefit of the doubt. But the dark side is that Tokyo remains addicted to easy money and debt. Both problems need to be treated before Japan’s economy can be healthy again.Posted on: 2003-11-09 10:34
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