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

Gary R. Saxonhouse and Robert M. Stern

or minus 1% over a three-year horizon. To achieve this end, the Bank of Japan    110

should buy large amount of market-indexed ETFs (Exchange Traded Funds) and   111

market-indexed REITs (Real Estate Investment Trusts). If this measure is not ef-    112

fective, the government should break the nominal interest rate floor by levying a    113

tax on all government guaranteed financial assets.                                   114

Willem Buiter provides a somewhat different view in “Overcoming the Zero 115
Bound on Nominal Interest Rate: Gesell’s Currency Carry Tax vs. Eisler’s Parallel 116
Virtual Currency.” He notes that despite the zero lower bound on the short-term rate 117
in Japan having become a binding constraint, conventional monetary policy in the 118
form of generalized open-market purchases of government securities of all 119
maturities has not been pushed to the limit where all outstanding government debt 120
and all current and future government deficits are or are confidently expected to be 121
monetized. As long as the risk-free nominal interest on financial instruments of any 122
maturity remains positive, a currency tax, in Buiter’s view is unwarranted.           123

Unlike Buiter, Fukao does not think that the massive open-market purchases of   124

long-term bonds is feasible. If the Bank of Japan holds a massive amount of long-    125

term JGBs when long-time interest rates rise it will experience a very large capital    126

loss. At the very time it is experiencing this loss, it will also be necessary for it to    127

raise short-term interest rates by mopping up excess liquidity. Fukao believes that    128

before it will be able to accomplish this completely the Bank of Japan will run out    129

of assets to sell. If it is to continue with its open-market operation it will be forced    130

to issue interest-bearing promissory notes. According to Fukao, this will result in    131

the Bank of Japan being forced to turn to the government for a subsidy.            132

In contrast, not only does Buiter feel charging negative interest on money is    133

unnecessary, he worries that it will be administratively difficult. The original    134

proposal made by Silvio Gesell that currency be stamped to indicate that it is    135

current on interest rates is feasible, but Buiter feels it will be costly and intrusive,    136

and, therefore, should only be used as a last resort. Buiter notes that a proposal    137

made by Robert Eisler in 1932 overcomes the problems of both cost and in-    138

trusiveness by unbundling the medium of exchange/means of payments function   139

from the numeraire function of money through the creation of a parallel, virtual    140

money. By controlling the exchange rate between the means of payment and the   141

numeraire, specifically by appreciating the value of the currency in terms of the    142

numeraire, monetary authorities such as the Bank of Japan, can achieve a negative    143

interest rate on the numeraire even though the interest rate on currency remains    144

constrained by the lower bound.                                                  145

Eisler’s proposal raises the fundamental issue about who chooses or what 146
determines the numeraire used in private wage and price contracts. According to 147
Buiter, Eisler’s implicit assumption that monetary authorities can credibly deter- 148
mine the numeraire used in private wage and price contracts is shaky both a priori 149
and empirically. What might otherwise be a neat solution to a difficult problem 150
remains suspect.                                                                     151

2.5 Supply shocks and Japanese deflation                                         152

As noted, Hamada and Noguchi, in their paper for this Symposium, dismiss the role 153
of positive supply shocks as a cause of Japan’s deflation. Indeed, they attribute the 154
long delay in Japan’s recovery to the mistaken view that Japan’s deflation reflects 155

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