Expect more of the same policies from the Bank of Japan (BOJ) for the indefinite future. The BOJ will continue to keep the short-term interest rate at or near zero and afford modest growth in the monetary base.
The interesting thing is that on Friday the BOJ gave a somewhat sanguine outlook about the country's growth prospects when it forecast that the economy will grow by 2.5 percent through the fiscal year 2003, which ends in March next year.
Still, BOJ Governor Toshihiko Fukui said that he views the economy through "cautious eyes." The problem, as he must see it, isn't growth; it's deflation, which is defined as a sustained fall in the consumer price or producer price level. Many economists view deflation as seriously as the collapse of the nation's banking sector.
The BOJ report forecasts consumer price deflation will endure past the March end of the fiscal year. The median forecast of BOJ's nine-member board calls for a drop of 0.3 percent in prices for the current fiscal year.
Fukui takes this very seriously. On Friday he said, "The Bank of Japan aims at putting Japan's economy back on a sustainable growth path by firmly maintaining the quantitative easing policy based on clear and concrete commitment with reference to the CPI." Now how could it be the case that an annualized decline of 0.3 percent in prices could achieve such importance in monetary policy? There's something unsettling about the price of goods falling on a consistent basis. People sense something must be wrong with the economy. This may be a legacy from the Great Depression, when falling prices became a symbol of the economic crisis.
Stock prices go up and down. When the price of rice or potatoes drops year after year, consumers have to wonder what's wrong with the economic system.
The cure offered by the authorities is often worse than the disease. While the phenomenon originates from monetary policy -- insufficient growth in the money supply -- governments often react by trying to control the price of goods and the level of production.
That's what was so tragically wrong about the policies of president Franklin D. Roosevelt's administration in the 1930s.
The New Deal policies tried to cure the depression by keeping prices from falling to protect producer profits. This in turn protected jobs.
Only a scoundrel would cut his price, so it was thought, and so it was enacted into law.
This idea is a fast trip to the belief that competition among suppliers is a harmful exercise. Follow this and you'll end up with no measurable deflation and no growth, either.
Japan today may have been a victim of the same knee-jerk reaction to deflation that prolonged the US depression in the 1930s. When prices fall, governments become protectionist.
The Japanese government's reaction to the last 13 years of economic malaise and accompanying deflation has been to block the competitive reconstruction of the economy.
You see this everywhere you look, in the forestalling of corporate bankruptcies and in banks continuing to lend to non-performing loan clients. The country has been on a mission to save companies from having to face competitive forces.
If prices need to fall, they need to fall. And if businesses are pressed by falling prices, then they need to be pressed.
Extending credit and other lifelines to companies that are technically insolvent does no one a favor.
For its part, the BOJ is right to continue to expand the money supply. That part is axiomatic, though it is far from certain that the BOJ has done enough money creation to curb falling prices.
The rest is experience. And this much is clear: A little bit of deflation can be the father of a great deal of very harmful policy response.
Tropical Storm Gaemi strengthened into a typhoon at 2pm yesterday, and could make landfall in Yilan County tomorrow, the Central Weather Administration (CWA) said yesterday. The agency was scheduled to issue a sea warning at 11:30pm yesterday, and could issue a land warning later today. Gaemi was moving north-northwest at 4kph, carrying maximum sustained winds near its center of up to 118.8kph and gusts of 154.8kph. The circumference is forecast to reach eastern Taiwan tomorrow morning, with the center making landfall in Yilan County later that night before departing from the north coast, CWA weather forecaster Kuan Shin-ping (官欣平) said yesterday. Uncertainty remains and
SEA WARNING LIKELY: The storm, named Gaemi, could become a moderate typhoon on Wednesday or Thursday, with the Taipei City Government preparing for flooding A tropical depression east of the Philippines developed into a tropical storm named Gaemi at 2pm yesterday, and was moving toward eastern Taiwan, the Central Weather Administration (CWA) said. Gaemi could begin to affect Taiwan proper on Tuesday, lasting until Friday, and could develop into a moderate typhoon on Wednesday or Thursday, it said. A sea warning for Gaemi could be issued as early as Tuesday morning, it added. Gaemi, the third tropical storm in the Pacific Ocean this typhoon season, is projected to begin moving northwest today, and be closest to Taiwan on Wednesday or Thursday, the agency said. Today, there would likely
DISRUPTIONS: The high-speed rail is to operate as normal, while several airlines either canceled flights or announced early departures or late arrivals Schools and offices in 15 cities and counties are to be closed today due to Typhoon Gaemi, local governments announced last night. The 15 are: Taipei, New Taipei City, Taoyuan, Tainan, Keelung, Hsinchu and Kaohsiung, as well as Yilan, Hualien, Hsinchu, Miaoli, Chiayi, Pingtung, Penghu and Lienchiang counties. People should brace for torrential rainfall brought by the storm, with its center forecast to make landfall on the east coast between tonight and tomorrow morning, the Central Weather Administration (CWA) said. The agency issued a sea warning for the typhoon at 11:30pm on Monday, followed by a land warning at 11:30am yesterday. As of
CASUALTY: A 70-year-old woman was killed by a falling tree in Kaohsiung as the premier warned all government agencies to remain on high alert for the next 24 hours Schools and offices nationwide are to be closed for a second day today as Typhoon Gaemi crosses over the nation, bringing torrential rain and whipping winds. Gaemi was forecast to make landfall late last night. From Tuesday night, its outer band brought substantial rainfall and strong winds to the nation. As of 6:15pm last night, the typhoon’s center was 20km southeast of Hualien County, Central Weather Administration (CWA) data showed. It was moving at 19kph and had a radius of 250km. As of 3pm yesterday, one woman had died, while 58 people were injured, the Central Emergency Operation Center said. The 70-year-old