Through Koichi Hamada’s remarks, this piece examines the limits of monetary easing, corporate cash hoarding, wage stagnation, and how rating agencies and IMF rhetoric undermine Japan’s national interest—culminating in a pointed question that exposes the flaw.

2016-02-02

The following continues from the previous chapter, taken from the January 31 issue of the Sankei Shimbun.
(Emphasis in the text is mine.)

“There is some difference in temperature between Professor Krugman and myself. His thinking is closer to traditional Keynesian policy. Richard Koo, Chief Economist at Nomura Research Institute, said in a lecture that while monetary policy would normally work, in Japan—where deflation has persisted for a long time—the expectation that inflation will not occur has become entrenched. On top of that, the experience of the Lehman crisis has stuck in people’s minds. There are limits to generating inflation expectations through monetary policy alone when interest rates are at zero. A wounded economy can only be saved by fiscal policy. That can also be said to be Professor Krugman’s view.”

— So you are not enthusiastic about aggressive fiscal spending?

“I see problems of fiscal rigidity—what you might call big government—everywhere. In fact, when you look at places like the Ministry of Education, it’s not the top officials but the mid-level ones who cling to very old-fashioned logic and do terrible things.”

— Despite unconventional easing, the cycle of a weaker yen, higher stock prices, and increased corporate profits has failed to produce the expected ‘trickle-down’ effects on employment and consumption.

“In reality, the relationship between poverty and wealth disparities cannot be resolved by monetary policy. Not with such a feeble trickle-down. In that sense, I understand what Professor Krugman is saying. I also think the biggest cause lies in the corporate sector. Companies try not to raise wages, refrain from paying dividends, and instead accumulate financial assets. This obsession with holding money—large amounts of highly liquid quasi-money (easily convertible financial products, editor’s note)—prevents the inflation expectations that Deputy Governor Kikuo Iwata of the Bank of Japan talks about.”

— Prime Minister Abe is strongly urging the private sector to raise wages.

“I used to say wage increases should be left to the market, but recently I have come to agree with Prime Minister Abe that companies should also distribute bonuses. The idea that Japan’s labor market is perfectly competitive is mistaken. Structural factors are obstructing it. If labor supply and demand tightened naturally and wages rose accordingly, miserable situations like those seen in the food-service industry should not occur in the first place. Given such circumstances, I have come to think intervention may be necessary. I do not object.”

— In your dialogue book, there is an account by Cabinet Advisor Etsuro Honda (Visiting Professor at Meiji Gakuin University) stating that because the Ministry of Finance loudly proclaims that Japan’s government debt is severe, major overseas rating agencies conclude that Japan’s high credit rating is inappropriate. It is also said that IMF officials from the Ministry of Finance argue that even a 10% consumption tax is insufficient.

“There is a tendency in Japan, much like with wine, to place excessive value on ratings by rating agencies. In that sense, the Ministry of Finance works very hard—for its own interests, harming the national interest. The IMF’s chief economist says with a straight face, ‘Japan’s fiscal situation must be bad, right?’ I recently confronted an old acquaintance, a professor at the University of Chicago who insisted on this, by asking him, ‘Are you short-selling Japanese government bonds in the market?’”