Focus, 27 June 2001, Tokyo

By Nishida, Nikkei Quick News Service, Tokyo

Focus: Questioning the BoJ's policy (3) "Reform the BoJ without holy cows", says Richard Werner

[NQN] According to Richard A. Werner, lecturer at Sophia University and chief economist at Profit Research Center, the financial policy the Bank of Japan should be taking is "credit creation". This means that the BoJ purchases all kinds of assets such as privately held government bonds, corporate bonds, CPs, stocks, real estate, etc. It is necessary to supply capital to markets that have many participants. Private investors can get cash by selling their assets to the BoJ and thus can purchase new assets with the cash. These transactions change the investors' portfolios, and money starts circulating in the economy.

The reason Japan fell into the current recession is because "there is not enough money". The BoJ claims that there is no domestic demand for capital, and therefore, no matter how much capital it attempts to inject, there will be hardly any effect on the economy. But this is not true. The Japanese government, itself, has the world's biggest demand for capital. Private investment is decreasing because the government devours money from the private sector by issuing national bonds in order to procure capital. This situation could be avoided if the BoJ, instead of the private sector, lent capital to the government. While there may be no demand for capital among big corporations, medium and small companies need capital but cannot borrow it from banks.

In March, the BoJ decided to implement quantitative monetary easing, but no large effect on the economy can be expected, simply because the present policy to make the current account balance about 5 trillion yen just causes private financial institutions to increase the money they deposit with the BoJ. The reasoning of the BoJ during the last 10 years of recession has not changed at all. The BoJ wants to use the recession to change the structure of the Japanese economy. It gave the appearance of easing the (money) market by manipulating interest rates, when in reality it decreased the amount of credit creation.

The BoJ has been preaching the importance of "structural reforms" and a "merit system" in the private sector. Yet the one who needs it the most is the BoJ itself. The government should give the BoJ assignments, which it then has to achieve. If it does not comply with them, decisive measures should be taken such as imposing penalties on those responsible. The Koizumi Administration emphasizes "reform without holy cows", yet it has not noticed the existence of the holy cow that is the BoJ. It is imperative to reform the policy-making of the Bank of Japan.