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Mr. Tamim Bayoumi, Mr. Guy M Meredith, and Bijan B. Aghevli

Abstract

This conference volume is based on a one-day seminar on Japan held at the IMF in early 1997 that I chaired, in which the staff presented their views on various sectors of the Japanese economy and the results from current research on new topics. In addition to other members of the IMF, we were lucky to be able to invite an impressive list of outside experts on the Japanese economy, who contributed immensely to the quality of the discussion. From the local area, we had Drs. Ralph Bryant and Edward Lincoln from The Brookings Institution, Dr. Joseph Gagnon from the U.S. Federal Reserve, and Professor Junichi Goto, at that time at the World Bank on leave from the University of Kobe. We were also pleased to have three invitees from other parts of the United States, Professors Koichi Hamada from Yale University, Fumio Hayashi from Columbia University, and Gary Saxonhouse from the University of Michigan, as well as Dr. Jean-Claude Chouraqui from the Organization for Economic Cooperation and Development (OECD). And we were particularly honored to have a number of senior officials and academicians from Japan, including Dr. Haruhiko Kuroda from the Ministry of Finance, Dr. Masaru Yoshitomi from the Long-Term Credit Bank of Japan, Dr. Masahiko Takeda from the Bank of Japan, and Professors Kazuo Ueda and Masahiro Kawai, both from the University of Tokyo, whose presence helped make the event a success. Having so many learned experts on Japan together at one time to share their knowledge and insights with us was exciting indeed.

Mr. Tamim Bayoumi, Mr. Guy M Meredith, and Bijan B. Aghevli

Abstract

Masahiko Takeda opened his remarks by noting two underlying themes in the papers presented by the staff. The first theme was that, in the period after the bursting of the bubble until 1995, monetary policy had been too slow to support the economy. The second theme was that one of the reasons for this failure was that the Bank of Japan had focused on the wrong indicators and that, in particular, the use of a monetary conditions index (MCI), which weighted together the short-term interest rate and the exchange rate, would have provided superior signals about the appropriate stance of monetary policy, as would have an inflation target with a lower floor for inflation. On the first point, Takeda noted that one could plausibly argue that the Bank of Japan had remained too contractionary over much of the 1990s, although this assessment involved a good deal of hindsight, and had been much less clear at the time. His main concern with the staff’s analysis, however, was with the use of the MCI as a guide to policy. The MCI was a mixture of a policy variable under the direct control of the Bank of Japan (short-term interest rates as defined by the official discount rate) and another variable whose price was determined in asset markets (the exchange rate), but which was significantly affected by the behavior of short-term interest rates. Sorting out the truly exogenous impact of the exchange rate from the induced impact from monetary policy was a difficult econometric exercise. Furthermore, it remained unclear whether the MCI incorporated all of the information contained in its individual components, let alone other information relevant for the conduct of monetary policy. For this reason, he felt that the Bank of Japan was likely to retain its more eclectic approach on the conduct of monetary policy. Takeda was also skeptical about the value of an inflation target. He noted that inflation had remained low over the bubble period, and hence would not have provided a useful signal for monetary policy at that time. He also felt that there could be definite advantages to not being too open about the conduct of monetary policy, at least in an economy such as the Japanese, in which the central bank had considerable anti-inflation credibility.

Mr. Gabrielle Lipworth

Abstract

To assess quantitatively the impact of changes in financial conditions on aggregate demand in recent years, this chapter discusses extensions to the staff’s past analysis of the monetary conditions index (MCI) for Japan. This work has been motivated in part by criticisms that the MCI—which focuses on the combined impact of real interest rates and the real exchange rate on aggregate demand—does not incorporate a sufficiently broad range of financial indicators: in particular, it omits the effects of changes in equity prices and fiscal policy. To include these factors, a broader measure of financial conditions has been constructed that combines the effects of changes in interest rates, exchange rates, equity prices, and fiscal variables. The staff refers to this construct as the financial conditions index (FCI).

Mr. Guy M Meredith

Abstract

Japan’s fiscal position has exhibited large swings over time, deteriorating through the 1970s, improving through the 1980s, and then deteriorating again through the first half of the 1990s (Figure 12.1). While some of these movements reflect cyclical factors, most of the changes in the deficit have been structural. To gain some perspective, it is instructive to go back to the late 1970s, when the general government deficit reached 7 percent of GDP. In response to this fiscal deterioration, the government embarked on a medium-term fiscal consolidation program by setting a number of deficit reduction targets. These targets, however, had to be deferred repeatedly in the early 1980s, and it was not until the emergence of the bubble economy in the latter part of the decade that sharp increases in revenue brought the general government account into balance. This experience points to a common misconception about the fiscal process in Japan: the fiscal process is immune to political pressures for higher spending, and therefore, the Ministry of Finance is in a strong position to quickly correct any fiscal imbalances.

Mr. Tamim Bayoumi

Abstract

Ensuring fiscal accountability is an important objective for any society. This issue has come increasingly into focus in Japan in recent years, as in almost every other industrial country, owing partly to underlying economic and social trends. Slower economic growth since the early 1970s has reduced the rate of increase of new economic resources, thereby focusing interest on how such new resources are used. Aging populations and rising levels of government debt (in relation to output) have increased public concern over the sustainability of existing fiscal policies. Specific events have also played a role. The privatization program of the Thatcher government in the United Kingdom, for example, has heightened awareness of the inefficiencies of many public corporations and the potential gains from privatization.1 An important aspect of fiscal accountability is transparency, as it is only when the public has an understanding of the operations and objectives of government agencies that a clear picture of government policy can be obtained.2 Fiscal transparency covers a wide range of topics associated with providing an accurate assessment of the government’s fiscal operations, ranging from microeconomic questions, such as improving incentives for government employees, to macroeconomic ones, such as evaluating the impact of current policies on future deficits. It encompasses basic issues, such as ensuring that a budget is adequately scrutinized, and more complex questions, such as the impact of fiscal rules on the economy.3

Mr. Tamim Bayoumi, Mr. Guy M Meredith, and Bijan B. Aghevli

Abstract

Haruhiko Kuroda limited his remarks on the papers to two general points and two technical questions. On the fiscal stance in 1997, the multipliers used by the Ministry of Finance were slightly different from those used in the IMF, being somewhat higher for government spending and lower for taxes, although the differences were not large enough to significantly alter the analysis. With regard to the medium-term consolidation, he noted that the FY 2003 objectives were complemented by other measures. In particular, the current focus of consolidation efforts was on the “Special Reform Term” period of 1998/2000, which implied a front-loaded consolidation plan, and that the additional long-term objective of keeping the sum of taxes and social security contributions below 50 percent of national income was a further source of pressure for long-term reforms. Turning to the paper on fiscal transparency, Kuroda agreed that the FILP was a source for concern, but felt that the paper failed to recognize that the Diet had control over almost all government operations. More specifically, he did not feel that the JNRSC debt was a good example of lack of transparency, as the money provided to the Fund was part of the FILP budget, and hence was provided in an open manner subject to parliamentary control.

Kenji Okamura

Abstract

Reflecting weak activity and countercyclical measures, Japan’s fiscal position severely deteriorated during 1992-96, entirely reversing the consolidation effort in the 1980s. As Japan’s fiscal situation faces major challenges associated with the rapid aging population, which underscores the need to secure sound fiscal management, consolidation is a high priority on the policy agenda.

Mr. Tamim Bayoumi, Mr. Guy M Meredith, and Bijan B. Aghevli

Abstract

This seminar generated lively debate on a wide range of policy issues and allowed a productive interchange of views between IMF staff and knowledgeable outsiders. The following is a brief assessment of what was learned in each session.

Bijan B. Aghevli

Abstract

Sharp swings in the yen in recent years have had an important influence on the course of Japan’s downturn and subsequent recovery. In particular, the appreciation that began in late 1992 through mid-1993 weighed down aggregate demand, thereby amplifying the cyclical downturn in activity. In early 1995, as some of these recessionary pressures were beginning to unwind and initial signs of recovery were emerging, a further sharp jump in the yen caused equity prices to plunge, threatening to throw the economy back into recession. By contrast, the depreciation of the yen in 1996 and early 1997 provided support to activity.