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

Reversal of fortune: Macroeconomic policy, International Finance, and Banking in Japan

an acceleration of technological progress. In his contribution to this Symposium, 156

“Good Deflation/Bad Deflation and Japanese Economic Recovery,” Saxonhouse, 157

following Bordo et al. (2004), notes that, whatever the current situation in Japan, 158

economic history certainly suggests that technological progress can go hand in 159

hand with general deflation. Conducting a VAR analysis using very detailed in- 160

formation about the components of Japan’s consumer price index, Saxonhouse 161

finds that short-run shocks to Japan’s relative price structure persist in the long run. 162

Given this finding, he concludes that such shocks are real in origin and reflect 163

technological change. As no effort has yet been completed to show the full extent to 164

which technological change is driving short-run relative price change in Japan 165

compared with other factors, and the full extent to which relative price changes are 166

driving aggregate price change compared with other factors, the policy impli- 167

cations of Saxonhouse’s findings are unclear. Nevertheless, they may provide some 168

support for Ihori’s and Nakamoto’s view on the relationship between deregulation 169

and macroeconomic improvement. What is clear, however, is that it is a mistake to 170

dismiss out of hand the possibility that technological shocks are playing an im- 171

portant role among other forces in Japan’s current deflation. 172

3 Macroeconomic policy and the exchange rate 173

3.1 Intervention policy and exchange rate changes 174

In the debate over whether non-standard monetary policies, such as those discussed 175

by Mitsuhiro Fukao and Buiter are needed, it is sometimes forgotten that 176

unsterilized exchange rate intervention remains a monetary tool that can be used to 177

stimulate the Japanese economy (Svensson 2001, 2003). Takatoshi Ito’s paper, 178

“Interventions and Japanese Economic Recovery” and Rasmus Fatum’s and 179

Michael Hutchison’s paper, “Foreign Exchange Rate Intervention and Monetary 180

Policy in Japan, 2003-04,” both examine the rationale behind the massive increase 181

in foreign exchange market intervention in 2003-2004 and evaluate its effective- 182

ness in promoting an external value of the yen and a change in the money supply 183

that supported Japanese economic recovery. Using different approaches, both 184

papers document the dramatic change in intervention that commenced in Japan in 185

January 2003 and continued until March 2003. During these 14 months 3.5 trillion 186

yen (7% of GDP) in interventions were conducted. Unlike interventions conducted 187

in the preceding six years when Eisuke Sakakibara and Haruhiko Kuroda were 188

Vice Ministers for International Finance at the Ministry of Finance, these in- 189

terventions were both frequent and unannounced. While agreeing on the outline of 190

the changes in policy, Ito and Fatum-Hutchinson disagree to as to whether in- 191

tervention policy was effective in preventing the yen appreciation that a fragile 192

Japanese economy battling deflation could ill afford. Ito estimates a reaction 193

function explaining Japanese intervention. He finds that the unannounced in- 194

terventions in 2003-2004 might have been larger because they were not as 195

effective yen-for-yen as the announced intervention during the Sakakibara-Kuroda 196

period. Nevertheless, by selling 3.5 trillion yen Ito finds that the Japanese 197

authorities achieved a yen-dollar range from 105 to 115 in Spring-Summer 2004, 198

instead of the range 90 to 100 that he feels would otherwise have prevailed. In other 199

words, Ito finds that a 13.3% depreciation was achieved by “leaning against” the 200