Reversal of Fortune: Macroeconomic Policy, International Finance, and Banking in Japan

Gary R. Saxonhouse and Robert M. Stern

2 Macroeconomic policy                                                  26

2.1 The disconnect between professional economists and policy-making in Japan 27

In their paper, “The Role of Preconceived Ideas in Macroeconomic Policy: Japan’s 28
Experience in Two deflationary Periods,” Koichi Hamada and Asahi Noguchi take 29
pains to point out that the past 15 years is not the only time in the past 100 years that 30
Japan has suffered severe peace-time economic difficulty. The years immediately 31
after the First World War and the 1920s were also difficult times for Japan. Hamada 32
and Noguchi see a link between the two periods. In both periods policy makers and 33
the public had a basic misunderstanding of the source of the problems facing the 34
Japanese economy and the steps needed to promote Japan’s recovery. Sadly, in 35
each case, many professional economists correctly diagnosed Japan’s situation, but 36
were unable to influence the policy process.                                         37

In the 1920s, Japan’s policy makers, Japan’s newspapers, the Japanese public, 38
and even Japan’s academic economists believed that a return to the gold standard at 39
the pre-World War I parity would restore strength to the economy. Only private 40
sector economists, such as Kamekichi Takahashi and Tanzan Ishibashi, fully 41
appreciated the costs Japan might face if it attempted the deflation of prices and 42
wages that required for a return to the pre-war regime. It was only after Japan 43
experienced much of these costs that policy makers were willing to change course. 44

According to Hamada and Noguchi, the roles policy makers, newspapers and 45
professional economists have played in the most recent policy debate on deflation 46
is very similar to what occurred 80 years ago. Once again, policy makers, 47
newspapers and the public for many years were very tolerant of deflation. Deflation 48
was seen as a necessary by-product of structural adjustment. For many, the more 49
deflation, the more evidence that progress was being made on the road to economic 50
recovery. Once again, economists, this time among them many academic econ- 51
omists, stood apart from this consensus. Viewing deflation as a monetary phe- 52
nomenon, they called on the Bank of Japan to adopt a highly expansionary 53
monetary policy so that Japan’s economic recovery might commence. As in 1920s, 54
in Hamada’s and Noguchi’s view it was only after Japan had experienced a long 55
period of unnecessary stagnation that both the policy makers and the public 56
changed their outlook and expansionary monetary policy commenced.             57

Hamada and Noguchi are at pains to emphasize that it was not self-interest that 58
caused policy makers and the press to champion diagnoses and policies that they 59
later learned were wrong. Rather, economists had difficulty in mobilizing support 60
for steps that ultimately proved to be entirely correct. It is possible that changes in 61
the government’s economic policy-making institutions (the creation of the Council 62
of Economic and Financial Policy in the Cabinet Office in 2001) that make it easier 63
for academic economists to participate in the critical discussions that shape policy 64
may make this less a problem in the future.                                       65

2.2 Price expectations and monetary policy                                       66

Changing price expectations are one channel through which an expansionary 67
monetary policy promoted by the Bank of Japan can fight deflation. Despite its 68
potential importance, however, there has been relatively little research in Japan on 69

<<   1   2   3   4   5   6   >>

More intriguing information