By Vicki Schmelzer
NEW YORK (MNI) – Bank of Japan Governor Masaaki Shirakawa Thursday
reviewed the causes of the economic and financial crises of Japan and
the U.S.
Shirakawa, in comments to the Economics Club of New York, offered
no insight into whether the BOJ might adjust growth and inflation
targets next week.
“In the case of the U.S., the current financial crisis, which
started in August 2007, is the worst crisis since the Great Depression
era,” Shirakawa said.
Watching the U.S. financial crisis unfold, “I cannot but help feel
a sense of deja vu,” he said, referring to Japan’s experience.
“Two pressing issues” have emerged from the current crisis, which
has “not yet reached the end of its cycle,” Shirakawa said.
The global economy needs to be brought “back to a sustainable
growth path” and steps must be taken to “prevent the recurrence of such
a crisis.”
In this vein, financial institutions, non-financial corporations
and policy-makers all need to “rethink the validity of the mindset which
business strategies are developed, and of the philosophy behind the
policy conduct that we had become so accustomed to,” Shirakawa said.
The notion of a “cycle of confidence” plays a decisive role in
financial crises, especially when complacency sets in.
Over-confidence leads to under-confidence and to rebuilding efforts
and the cycle begins again, Shirakawa explained.
In Japan, in the late 1980s, the country grew at an annual rate of
5.1% while other G7 countries averaged 3.4%.
At the time, inflation measured by CPI was on average 3.9% in G7
countries, but was 1.1% in Japan, he noted.
“Although inflation targeting became popular later in the 1990s, if
one were to apply the criteria used by countries adopting inflation
targeting, Japan would have received an ‘A+’ during the latter half of
the 1980s,” Shirakawa observed.
Overconfidence in Japan in the 1980s led to the “bubble” that
followed just as overconfidence in the U.S. in the 2000s lead to the
U.S. “bubble.”
Monetary policy plays a secondary role to overconfidence in
causing bubbles, Shirakawa said.
While ” … bubbles do not transpire from expectations of low
interest rates alone … bubbles do not materialize without expectations
that low interest rates will continue,” he said.
Speaking of tools central bankers use to conduct monetary policy in
times of crises, Shirakawa focused on inflation targeting.
” … [U]nder an inflation targeting regime, the debate tends to
center on the relationship between the target inflation rate and the
actual or expected inflation rate,” he said.
“As a result, the cost of justifying adjustments in monetary policy
becomes quite high in the eyes of central bankers, when such adjustments
are aimed to deal with imbalances which appear in forms other than price
indices,” Shirakawa said.
In the latest crisis, central bankers warned early of excesses, but
took too few remedial actions against the individual financial firms.
This may have been because of overconfidence in the effectiveness
of private sector self-regulation and the disciplinary mechanisms built
into financial markets, Shirakawa said.
“Regulation is a necessary tool in maintaining financial stability,
but it is not possible to design regulation beforehand which can be
applicable to all future situations,” he said.
In terms of monetary policy, up to now the policy objective was
mainly “price stability,” Shirakawa said.
While “price stability” is an important element, “when a central
bank becomes too fixated on short-term price stability, this may
complicate the attainment of the ultimate objective of sustainable
growth,” he said.
In terms of financial indicators, Shirakawa stressed that “no
single indicator which can totally capture economic and financial
conditions,” adding that “the same is also true for prices.”
On the issue of increased “transparency” at central banks in recent
years, he said that “at the end of the day, the role of central banks,
regulators and supervisors is to prevent instability of the economy and
financial markets, which could materialize if simply left to the free
market competition.”
“If actions of policy-makers were based on mechanical rules, which
could be fully incorporated into the behavior of market participants,
this may rather end up being a source of instability for the market and
economy,” Shirakawa said.
In a question and answer period, he was asked about steps central
banks can take to prevent bubbles from occurring.
Shirakawa said that “central bank independence is very important”
but also that “no one can say monetary policy alone can cope with a
bubble.”
He was also asked about the prospects of China adjusting its yuan
policy.
Shirakawa reminded of the pressure Japan faced in the 1980s to let
the yen strengthen.
“Exchange rates should not be used as devices for trade,” he said.
Shirakawa said he hoped that China would maintain the domestic
strength of its economy appropriately.
Looking ahead, financial markets are eager to see if the BOJ will
revise GDP and CPI forecasts for fiscal years 2010 and 2011 in the
Outlook report due out April 30.
This week, the International Monetary Fund upgraded Japan’s growth
estimate for 2010 to 4.2% from 3.9% (in January).
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