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Home > Debates Last Updated: 14:30 03/09/2007
Online Debate

Preliminary Discussion: On the Bank of Japan's Interest Rate Policy


  • Atsushi MIZUNO (Chief Fixed Income strategist/Chief Economist, Japan Deutsche Securities Ltd., Tokyo Branch)
  • Richard WERNER (Managing Director, Profit Research Center Ltd., Japan; Assistant Professor, Sophia University, Japan)

Moderator: Takahiro MIYAO (Professor, GLOCOM, Int'l University of Japan)

MIYAO (GLOCOM): Let us start a preliminary discussion on the Bank of Japan's (BoJ's) interest rate policy. For the sake of our debate, Mr. Mizuno, could you first summarize your paper, "For the Bank of Japan: Implication of Termination of Zero Interest Rate Policy," which has been posted at our website?

MIZUNO (Japan Deutsche Securities Ltd.): In my article, I wanted to make the following points:
1) I applaud the BoJ's decision to end the zero interest rate policy, because the economy seems to be recovering with corporate earnings on the upswing, and a stock market plunge is unlikely.
2) Its postponement would have reduced the BoJ's credibility and worsen the speculation and uncertainties over prospects for the zero interest rate policy.
3) The basis tenets of the revised BoJ Law, particularly regarding the BoJ's greater autonomy should be recognized.
4) If, as I believe, the potential growth rate is 1.5%-2.0%, then an economy-neutral call rate would be at least 1.0%. From a long-term perspective, therefore, the conditions for a further tightening policy should gradually fall into place in line with positive developments in the economy such as the IT revolution.

MIYAO: Mr. Werner, would you like to comment on Mr. Mizuno's points?

WERNER (Profit Research Center Ltd.): I agree with the first two points, although I feel that Mr. Mizuno should have clearly stated that he expects the economy to achieve a self-sustaining recovery. On the potential growth rate, I would argue that it is currently about 4%, much higher than 1.5%-2.0%. So, there is no doubt that current call rates are still extremely low. The statement of the obvious fact that rates are low, however, does not tell us anything about what the economic implications are. For instance, we should remember that low rates did not do much to stimulate the economy for many years during the 1990s.

MIYAO: Please make your stance clear, Mr. Werner, for the sake of our debate.

WERNER: Mr. Mizuno seems to believe that the BoJ is reacting to the economy. In other words, he believes that economic growth happens autonomously, and the BoJ is merely reacting to this exogenous growth. If this was true, then the economic consequences of any interest rate move would be extremely limited under all circumstances. Also it seems that Mr. Mizuno feels that call rate is the main monetary policy tool of the BoJ. This must be disputed, however. In fact, the main monetary policy tool employed by the BoJ is the quantity of total credit creation. Using this tool as measure of its monetary policy stance, we find that the BoJ has since August not tightened, as the call rate move seems to suggest, but, to the contrary, it has sharply loosened its monetary policy. Moreover, the very recovery of 1999 and 2000 can be shown to come as no surprise to the BoJ. For the recovery was stimulated by the BoJ's very own quantitative stimulation policies, implemented in March 1998. We must therefore consider the BoJ not as merely reacting to events, but it must be recognized as the causal factor behind events, including the long recession of the 1990s and the bubble of the 1980s. It is in this light that its policies should be analysed.

MIYAO: Now, we can understand the both panelists' positions very well. It looks almost like a long standing debate between a BoJ representative who emphasizes the passive role of the central bank and an aggressive monetarist who regards money supply as the BoJ's powerful tool. In order to focus on pros and cons over the end of the zero interest rate policy, let me be a "devil's advocate" to take a position somewhat like Professor Fukao's in his article at this website, that is:
1) The Japanese economy is yet to recover. In fact it is still suffering from asset deflation and the wholesale price level is likely to fall further in the future. In this kind of situation, even the zero interest rate policy is not good enough, since the real interest rate is too high, due to the deflationary pressure.
2) Due to declining land prices and stagnant stock prices, there are so many firms with near-insolvent balance sheet positions in the Japanese economy. In this sense, we are yet to come out of economic emergency. The termination of the zero interest rate policy was a mistake, since rising long-term rates will hurt those near-insolvent firms and the whole economy by making asset deflation even worse in the future.
3) What is needed is even more aggressive money supply policy while keeping the zero interest rate in order to reflate the economy, which would lead to a normal situation where the BoJ's interest rate policy could function more effectively.

I know that Mr. Mizuno and Mr. Werner have so many things to say, but let us wait until next Tuesday (September 26) to have a full debate. In the meantime, we would welcome any comment/question from our audience.

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