The Debate on Repealing Quantitative Measures for Monetary Easing within Financial Policy
November 22 (Tuesday) 2005
The Bank of Japan is gradually hammering out a clear direction regarding the repeal of quantitative measures for monetary easing within its financial policy. The Bank of Japan's stance is to repeal the quantitative easing measures once there is certain promise that the Consumer Price Index (CPI) will reach a positive value. There are several reasons that form the backbone of this line of thought.
First, the perception of Japan's economic situation is that, as a result of expectations of rising business profits and growing government tax revenue, the economy will be able to adequately withstand the elimination of quantitative easing measures and interest rate hikes. A second reason is to restore the control functions of interest rates as a part of financial policy. A third reason is to improve discipline in business management and fiscal management by reviving the interest rate functions of financial policy. Fourth, the Bank of Japan hopes that improving discipline in this way will promote structural reform of the economy.
In response to these reasons, government authorities have recently moved closer to a definitive opinion regarding the early elimination of quantitative easing measures, symbolized by successive statements by Hidenao Nakagawa, the chairman of the Liberal Democratic Party's Policy Research Council. According to this stance, the GDP deflator, and not the CPI, should be used as a guidepost for deciding if the economy has cast off deflation. In other words, even if the CPI has become positive, if a negative trend in the Corporate Goods Price Index (CGPI) is predicted to continue for a time, and interest rates are raised as a result, then it is feared that corporate profits may be compressed, thereby putting a damper on economic recovery. If growth under quantitative easing measures continues further, it is thought that tax revenue will eventually rise, which would make it possible to curb government bond issuances.
On a different note, under the enormous amount of outstanding government bonds, if interest rates are raised then national debt management by the government will become difficult, which is likely to pose an obstacle for plans to reduce debt. Furthermore, as ever, Japan's economic turnaround is still not very strong, and though some predict that next year will hail a true economic recovery, there is also fear that raising interest rates will invite deflation. Prompted by these anxieties, statements warning against the Bank of Japan's repeal of quantitative easing measures are emerging from government authorities.
What must be kept in mind here is the importance of a balance between the independence of the central bank's financial policies and the government's economic policies. Regarding financial policy, the June 11, 1997 plenary session of the Upper House enacted a government-proposed bill to revise the Bank of Japan (under Prime Minister Hashimoto and Finance Minister Mitsuzuka) in order to secure the bank's independence. Under this bill, the independence and transparency of the Bank of Japan's financial policies became more systemically and strongly established. For example, if the Bank of Japan delivered the market some sort of surprise, as a result of the broad supervisory powers given to the Bank of Japan under these provisions, would allow the Bank to further strengthen the effects of its financial policy.
Currently, the Bank of Japan is continuing to carefully take its time in signaling the market. Thus, rather than a surprise, the current repeal of quantitative easing policies is aimed at preparing the groundwork for the market to accept a new policy.
Out of the above anxieties, authorities in the government are cautioning against premature policy changes by the Bank of Japan. One reason for the government's anxiety is the Bank of Japan's move to abolish the zero interest rate policy in 2000; unintended consequences of the move later caused the abolishment to be corrected, and it seems that distrust still lingers from the way in which the issue was handled.
In any case, independence in the Bank of Japan's financial policies should be honored as a fundamental principle, and the government should respect this independence and carry out sufficient dialogue with the Bank of Japan in order to promote its policies. Furthermore, there is also a need for the Bank of Japan to be more frank in explaining its decisions to the government. I feel that both the government and the Bank of Japan must respect each other's positions and share information adequately, avoid unnecessary friction and distrust as much as possible, and work together for the stable growth of the Japanese economy.