[paper] Japanese Deflation is a Monetary Phenomenon

Haruhiko Kuroda

The global economy presently carries three risks. One is the global stock market collapse. Its impact has put most of the Central and South American countries into currency and monetary crises. These have all resulted from collapse of the IT bubble and the new economy bubble in the U.S. In addition, though still indefinite, security problems such as a U.S. attack on Iraq and related terrorist movements may come up. I do not believe that the U.S.-triggered worldwide fall in stock prices and its influence are bottomless, but today, these risks must be sufficiently considered in carrying out economic management. Today, the top-priority policy targets for Japan are to dispose of non-performing loans and to stop the deflation. The issue of non-performing loans will be dealt with under the leadership of Fiscal and Financial Services Minister Heizo Takenaka; the basic direction seems correct, but as long as the continuous decline in prices goes on, new non-performing loans will keep on increasing in spite of the disposal efforts. Although the present deflation in Japan is partly attributable to such factors as the presence of China, excess capacity, and deregulation, the fact that prices are continuously falling in the long term unrelated to the cycle of the growth rate suggests that this deflation is after all a monetary phenomenon, and can only be remedied by monetary policy. What is more, a sense of deflation is already built into the economy. Such a sense could only be overturned by the Bank of Japan (BOJ) setting a target for price stabilization and expressing a strong determination to attain it, as well as making a commitment to use any kind of monetary policy instruments. Since traditional monetary policy no longer proves to be effective, the BOJ should drastically change its course and continue to buy long-term government bonds, targeting growth in money supply, until prices become stable. This decision must be made by the BOJ. The government cannot stabilize prices; only the BOJ can. Price stabilization and anti-deflation measures are basically the roles of the BOJ, and for this reason, price stabilization is listed as the primary goal in the Bank of Japan Law.