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