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Section II |
True or False
Some selected comments |
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1 |
"Inflation is always and everywhere a
monetary phenomenon" -- Milton Friedman
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R. Jerram |
True |
Friedman has a Nobel prize and I don't think
the BOJ will be getting one for their efforts. |
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P. Morgan |
True |
But this does not necessarily imply that
monetary policy holds all the answers. |
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C. Walker |
True |
The relationship is necessary but not
sufficient. That is, monetary changes have implications for
prices, but deflation (or inflation) may be caused by
non-monetary phenomena. |
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P. Sheard |
False |
s stated and widely interpreted, I have a hard
time agreeing: it makes it sound too much like "only monetary
policy matters", which is too simplistic and a recipe for bad
overall public policy. I would say "true" if rephrased as:
"Inflation always and everywhere has a monetary dimension".
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J. Koll |
True |
Focus on trasmission channel - one of three 1)
credit ; 2)wealth ; 3)exchange rate |
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2 |
Credit is "scarce" in Japan |
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R. Jerram |
True |
Falling loans reflect a supply problem not a
demand problem. |
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P. Morgan |
False |
Weak demand is the bigger problem |
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C. Walker |
False |
A tough one, but I don't think there are major
credit constraints operating here. |
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P. Sheard |
False |
If interpreted to mean that there is a
generalised "credit crunch". That does not mean, however, that
the banking system "problem" does not need to be fixed. It
does. But "fixing" it involves micro (a corporate and banking
sector with clean balance sheets and facing market
disciplines) and macro (ending deflation and deflationary
expectations) elements. Companies need to want to borrow
(there is demand) and be able to (the banks and capital
markets are in a position to create credit). Neither currently
obtain. |
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J. Koll |
False |
Credit is mispriced - it is too cheap ; because
of govt protection, loan gurantees and public loan crowding
(financial socialism) |
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3 |
Rising government debt levels hold NO
negative consequences for the future |
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R. Jerram |
False |
Absolute statements will nearly always be
rejected. |
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P. Morgan |
True |
The debt is basically all domestically held, so
it is not a net burden |
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C. Walker |
False |
Any solution to the debt problem will have
negative consequences. |
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P. Sheard |
False |
As stated, that is too extreme. Rising
government debt levels, from the current high level, mean
further deterioration in the state of public finances (and are
associated with increasing public sector involvement in the
economy) and imply a higher burden of fiscal or monetary
adjustment in the future. That is not to say, however, that
the debt should be reined in now. Policy is complex,
mutlifaceted, and involves numerous tradeoffs, all of which
need to be taken into account in trying to set the optimal
policy course. It is manifestly not true that "fiscal policy
is at its limit" (neither the macro balance nor the bond
market suggests that). Given that Japan is mired in deflation,
the benefits to sensible fiscal expansion probably outweigh
the costs, such as are alluded to in this proposition. |
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J. Koll |
5 |
A question of degree ; but in Japan's case the
public debt-dynamic is pointing towards irreversable debt trap |
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4 |
If allowed, further fiscal expansion CAN
lead to sustainable economic growth by itself |
| |
R. Jerram |
True |
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P. Morgan |
False |
Fiscal policy can prop up the level of demand,
but it has little impact on growth potential |
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C. Walker |
False |
Very unlikely. |
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P. Sheard |
False |
Again, as stated, and forced to a binary
choice, it is a bit too extreme to agree with. I take issue
with the "by itself" but otherwise would be inclined to agree.
Fiscal expansion, by itself, is not sensible and probably
wouldn't work, although a sustained fiscal expansion, with the
appropriate monetary support (=monetisation) might work (the
economy is too complex a beast to idealogically rule that out
- who knows when animal spirits might kick in?. However,
clearly the optimal policy mix should have include a important
component of policies that typically go under the (over-used)
rubric of "structural reform". |
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J. Koll |
True |
But only if accompanied by more aggressive
deregulation and entrepreneurial incentives |
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5 |
Zero interest rates are part of the problem
and NOT part of the solution |
| |
R. Jerram |
False |
This is a common misconception, but I think the
survival of weak companies is due to the balance sheet
problems of the banks, not due to zero interest rates. |
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P. Morgan |
False |
Real rates are not particularly low |
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C. Walker |
False |
Hard to see how raising interest rates could
help Japan. Even Herbert Hoover wouldn't do it. |
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P. Sheard |
False |
It is not true to say that zero interest rates
are not part of the solution. I certainly don't subscribe to
the view that the Bank of Japan should raise rates and force
restructuring (that confuses the alignment of policy
instruments with targets). Monetary policy aimed at
extricating the economy from deflation and reversing
deflationary expectations is needed, which means, given the
initial conditions, we need zero interest rates and more.
However, it is also true, in my view, that zero interest
rates, as part of the actual mix of policies adopted in Japan
over the years, have contributed to the current situation of
malaise - that merely admits that the policy mix has been mis-specified.
It is not to say that zero interest rates are not part of a
well-specified policy mix. |
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J. Koll |
True |
Zero rates = illusion of infinite wealth (if
borrowing cost is zero, banks can fund any asset, good ort
bad) ; together with financial socialism breeds core problem
of excess capacity |
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6 |
Japan's growing current account trade
surplus is a sign of its superior international
competitiveness with the West |
| |
R. Jerram |
False |
Exchange rates and relative demand/supply
conditions are more important. (And can I point out the
surplus has stopped growing). |
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P. Morgan |
False |
There is not much correlation with
competitiveness |
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C. Walker |
False |
A common fallacy. J productivity is generally
LOWER than that of other industrial nations. CA surplus is a
savings surplus. |
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P. Sheard |
False |
The current account surplus reflects the macro
savings balance: Japan has a surplus of macro savings which
shows up as a current account surplus in the range of 2-3%.
That is not to deny that Japan has international
competitiveness in many areas, but that is not the principal
driver of the current account or the trade surplus. |
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J. Koll |
False |
It's Japan's excess capacity being dumped into
the world ; and excess capacity stems from zero rates and
financial socialism |
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7 |
PM Koizumi has implemented real/meaningful
structural reforms to date |
| |
R. Jerram |
False |
Now you really have to be joking. |
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P. Morgan |
False |
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C. Walker |
False |
There has been a bit of progress here and
there, but overall, a rather discouraging performance, I'd
say. |
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P. Sheard |
False |
I assume that there is a hidden "a significant
number of" before "real/meaningful"; otherwise I would be
forced to agree. The Koizumi Cabinet's marketing of its
structural reform efforts is strong but its track-record is
weak. "Structural reform" is too general a term around which
to build a meaningful judgement but, sticking with it, I would
claim that the reform issue to which PM Koizumi has devoted
most attention and political capital - public sector and
fiscal reform - owes much to the Hashimoto Cabinet reforms:
notably the Trust Fund Bureau and Fiscal Investment Loan
Program reforms, which came into effect on 1 April 2001. On
the banking system cleanup, the Koizumi Cabinet dropped the
ball that was handed to it by the Mori Cabinet (in the form of
the 6 April 2001 "emergency economic measures") and it took
the prime minister a year and a half to pick it up again.
There has been some progress on deregulation, but so too was
there under every previous cabinet for the past twenty years,
and PM Koizumi's track record has been very disappointing
relative to his political rhetoric and to the amount of
political capital that the prime minister could have expended,
had he been committed and able. |
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J. Koll |
True |
Getting tougher on banks & corporations ;
cutting back financial; socialism ; could, of course, do much
more….
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8 |
Without an immediate resolution to the
non-performing loan issue, Japan's economy will NEVER
recovery. |
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R. Jerram |
False |
Never say never, but the sooner they fix the
NPLs, the better. |
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P. Morgan |
False |
It will just take a very long time |
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C. Walker |
False |
This too strongly worded, I think. I'd say a
full recovery is unlikely without fixing the NPL problem, but
I wouldn't rule it out. |
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P. Sheard |
False |
As phrased, the proposition must be false, as
"never" is a very strong word, and "immediate" imposes a very
strict condition. I would be inclined to answer "true" if the
word "immediate" was dropped and "never" replaced by "now".
The NPL problem reflects two things: impaired financial system
(and corporate borrower) balance sheets (a stock problem, also
a micro problem, reflecting an outcome) and ongoing asset
deflation (a flow problem, also a macro problem, representing
the first-order cause). It will be difficult for the economy
to recover on a sustainable basis while these two factors
pertain. I regards a solution to the NPL problem as more in
the way of a necessary rather than sufficient condition for
recovery. The "solution" must involve two elements that
address the micro (mainly the FSA's job) and the macro aspects
(mainly the BOJ's job). A two-pronged solution involves policy
synergies: cleaning up balance sheets (ie, eliminating the
debt overhang), recapitalising, and imposing market
disciplines (the micro agenda) will improve the efficacy of
monetary policy and help to put an end to falling asset prices
and policies aimed at reversing asset deflation will help to
ease the adjustment costs of the cleanup process. |
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J. Koll |
True |
if you mean self-sustaining recovery |
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9 |
The budget deficit today is nothing but a
postponement of further tax increases tomorrow |
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R. Jerram |
False |
Monetise the debt and inflation will eat away
the real value of the govt debt. Inflation is a tax of sorts,
I suppose. |
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P. Morgan |
False |
It mainly reflects weak demand |
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C. Walker |
True |
True in the broad sense. The tax may come in
the form of inflation. |
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P. Sheard |
False |
Budget deficits allow borrowing against future
tax revenue, but there is more to it than that (and one should
distinguish increases in tax rates or forms of taxes from
increases in tax revenue, given the same tax system settings). |
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J. Koll |
True |
Especially in a society where the ability to
pay-back through aggregate income growth is constrained by
rapid ageing and no immigration |
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10 |
If it wanted to, the Bank of Japan could set
a credible inflation target and then supply liquidity through
quantitative easing to meet that target, so that people would
expect inflation and start borrowing money to spend
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| |
R. Jerram |
True |
ust a question of how much is enough, and which
instruments are most efficient. |
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P. Morgan |
False |
Quantitative easing has already clearly failed
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C. Walker |
True |
Unfortunately, BOJ doesn't believe this. |
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P. Sheard |
True |
he BOJ could create inflation by printing
enough money - full stop. To quote Fed Governor Bernanke on
the subject: "if the price level were truly independent of
money issuance, then the monetary authorities could use the
money they create to acquire indefinite quantitites of goods
and assets. This is manifestly impossible in equilibrium".
That is not to say that other policies - fiscal, financial
system, structural - do not matter. |
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J. Koll |
True |
Transmission mechanism is must be weaker Yen
(population plus ageing plus no immigration makes asset +
credit channel ineffective) |
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Source:
JapanReview.net 2003 Economist Poll |