"New Year's View"On the Deflation, Makoto Utsumi, President and CEO of JCR
JCR News
"New Year's View"On the Deflation, Makoto Utsumi, President and CEO of JCR
Jan. 04, 2013
The general election this time seems to have been an unprecedented event both internationally and historically, in which deflation and monetary policy were focused. Let's give some thoughts on these issues.
Firstly, on the definition of deflation. After the Great Depression, prices fell by 20-30% a year. During the time, "wait to buy" became a common behavior of consumers and caused demand to stagnate and contraction of economies to exacerbate. As a result, prices fell further. These phenomena are typical ones of deflation. A fall by 0.5% a year can be said as a range of error. It is difficult to think that this kind of fall can cause consumers' "wait to buy" behavior.
Secondly, an illusion that prices are solely determined by monetary policy. It is said that CPI fell by 0.5% owing to free tuition fee at public high schools, which went into operation in accordance with campaign pledge of the Democratic Party of Japan. In addition, impact of market liberalization on prices should not be ignored as shown by that consumers shifted to cheap imported rice this year because prices of rice produced in Japan rose.
Thirdly, on the inflation targeting. Inflation is the most inequitable taxation that hits the weak directly. Controlling inflation down to 2% or less would be considered. Monetary policy is effective for control of inflation. As such monetary tightening, however, can have a serious impact on corporate activities, consumers' purchases of houses and durable goods, financing of a country, etc., a central bank, which plays the bad guy role, should be independent from politics. Increasing outright purchases of Japanese government bonds (JGBs) by the Bank of Japan and reducing long-term interest rates to almost zero in order to target a 2% increase in prices is a policy that has the same effect to impose 2% consumption tax, while discounting the real value of deposits and savings of Japanese citizens.
Fourthly, the impact on the banking sector. The outright purchases of JGBs by the Bank of Japan not only minimize difference between short-term and long-term interest rates and then make bank operations difficult with the narrowest spreads, but make risk-taking lending difficult. Meanwhile, as outright purchases of JGBs, which is an unconventional monetary policy, become chronic, many banks, which have been accumulating holdings of JGBs, can be in extremely difficult situation as soon as the Bank of Japan abolishes this monetary policy. In that context, the Bank of Japan already gets stuck in a doodlebug's pit where the Bank of Japan faces the abyss whether it goes forward or stays. It is important that the Bank of Japan escape from this condition in some good ways, making a soft landing. However, whatever nuances, policies that can make the quagmire more serious are being proposed all together from politics at the moment.
Fifthly, the impact on the fiscal aspects. It is said that if long-term interest rates rise, the rise will cause a rise in expenditure for national debt service, and therefore the government finance cannot endure the situation. But, consider, if savings and bond holdings of Japanese citizens amount 1,000 trillion yen and a 2% interest rate is attached to this amount, Japanese citizens could have interest income amounting 20 trillion yen. As 20% of this interest income is subject to withholding tax, 4 trillion yen will be fiscal revenue. Given this assumption, the increase in the fiscal burden can be limited to a large extent.
Rather, while chronic operation of outright purchases of JGBs by the Bank of Japan has been loosening fiscal discipline to date, proposals made from all directions during the election are nothing short of increasing this risk.
In general, a country has to choose as its form between "warm, but heavy tax state" or "cold, but light tax state." However, Japan, in reality, has no choice but to be "not very warm, and heavy tax state" because of the extremely worsened fiscal conditions and rapidly aging society. It can be said that politicians who cannot appeal this fact to Japanese citizens seriously and cannot get their understanding are trying to charge all of their failures to the Bank of Japan.
