[paper] What Kind of Economic Policy is Required under Structural Deflation?

Eisuke Sakakibara: Professor of Keio University, Director of the Global Security Research Center

Eisuke Sakakibara is now a professor at Keio University and serves as director of the Global Security Research Center, being engaged in an analysis of global markets including Asia. Sakakibara graduated from the Economics Department of Tokyo University in 1964 and received his Ph.D. in economics from Michigan University in 1969.

Deflation is not something caused by a temporary lack of demand or a temporary monetary phenomenon, but it is a structural phenomenon that is progressing worldwide under the globalization trend. In Japan, the deflation is deepened due to the lack of potential high-earning opportunities pertaining to socialistic regulations. Since the low investment and low consumption pertain to structural factors, any supply of money would only build up assets to generate a bubble, and would not lead to inflation. Since there has been an immense qualitative change from the time of inflation to the time of deflation, there must be dramatic changes in policy, business management, and ways of thinking. Policy discussions based on conventional macroeconomics are meaningless today; the premises and framework of the theories have been changed. As structural deflation cannot be controlled, the policy target should be to prevent rampant deflation while making an allowance for gradual deflation. Under deflation, the disposal of non-performing loans would inevitably be conducted in a benevolent manner. Being in the same phase as the U.S. Great Depression in the 1930s, the current problems in Japan are supposed to be resolved by the depression itself, but preventing this, the government must take extremely bold measures. The state should voluntarily establish a corporate revitalization fund, gather knowledgeable people from various fields and work from the viewpoint of how industries and businesses should be rejuvenated. If this organization is established under the Deposit Insurance Corporation of Japan, huge funds can be raised with government-guaranteed bonds. At the same time, banks should think about making profits as private companies, and the financial supervisory function should be made independent from politics. The government also has to refrain from the populist attitude of requiring bank managers to take a greater responsibility rather than resignation or censuring banks. While public funds should not be readily expected but only allotted to any losses that have resulted from a bank’s rehabilitation efforts, the amount of public funds required would be 50 trillion to 60 trillion yen. This should be financed by one-time issue of a government note. The Japanese economy must undergo a major surgery of about five years with commitment under the initiative of a truly competent surgeon. The serious discussions on it have only just begun.