Japan's Cartel of the Mind
by William Pesek Jr.
Bloomberg News
July 21, 2003TOKYO - Rarely do comments by a central banker cause a person to spit out his morning coffee in surprise.
Toshihiko Fukui, governor of the Bank of Japan, certainly got my attention last week when he said that he "didn't 100 percent trust" conventional economic theories from abroad. The remark, made during a speech in which he argued for new economic theories tailored to Japanese society, is now the talk of Tokyo.
Fukui's comments are disturbing for two reasons. First, what does Fukui think Japan has been doing these past 20 years? Far from importing international ideas, the world's second-biggest economy has run away from them. All the while its problems have grown larger and so have the costs of fixing them.
Second, Fukui offered his thoughts at a conference meant to educate people on monetary economics. At such an event, it would be nice if Japan's monetary guru offered a more accurate appraisal of his country's policies.
After all, there's nothing imported about the zero-interest-rate policies of the Bank of Japan. The group he singled out for criticism, "the economic society of American people," has no hand in the unabashed socialism that Tokyo practices. And there isn't much that is international about Japan's banking system or its financial markets.
Most troubling about Fukui's views is that they fit with Tokyo's muddle-through strategy. Fukui has been viewed as Japan's great hope, an independent thinker who might shake up the country's tired economic model. But his latest comments make him sound like just another Japan apologist.
Japan needs to adhere more, not less, to international economic standards. Tokyo has never been willing to let bloated, unprofitable companies fail, or allow bank executives to cut off even the dodgiest borrowers. Nor has it let competition or entrepreneurship thrive.
By resorting to the "Japan is different" argument, Fukui also "seems to be building barriers to imports of foreign economic ideas," says Richard Jerram, chief economist at ING Securities Japan.
Japanese policymakers seem to have their own definitions. Economic boom? In Japan, that means 10 years of growth in excess of 0.1 percent. Floating currency? One that falls and makes the economy more competitive. Capitalism? In Tokyo, it means having markets that rise - and only rise.
Jerram calls it the "snow, intestines and economics argument." The reference is to a couple of the more surreal Japanese trade disputes in the 1980s.
Tokyo once considered slapping barriers on imports of foreign skis, claiming Japan's snow was different. Its restrictions on beef imports were based on the contention that Japanese intestines were different. Now Fukui is making a similar point about Japanese economics.
There is just one problem with all this: Economics isn't geographically specific.
Fukui appears to be admitting he has no rebuttal to claims that the Bank of Japan can fight deflation only by trying something new. This suggests the new central bank chief will not be forging a path all that different from that of his predecessor, Masaru Hayami.
It also raises questions about the 11 percent rally in the Nikkei 225 stock average this year. If the man charged with ending deflation is already resorting to excuses for Japan's plight, equity investors have little reason for optimism.
When Japan alone was facing deflation, the "our situation is different" argument passed the laugh test. Now that prices are falling in China, Hong Kong and, potentially, even bigger economies, Japan is hardly a unique case.
If Japan's economic reality is different, it is in the area of stubbornness. "No modern economy has ever tolerated persistent deflation for so long," Jerram says. "Japan isn't different because standard economic theories don't apply - it's different because they haven't been applied."
Some investors don't seem to care. The Nikkei has rallied this year, even though banks are still swimming in bad loans and the economy is depending on a U.S. recovery to avoid recession.
Deflation or no, yields are too low to compensate investors for the risk of owning government debt. Even so, yields have come off recent highs. Volatility in stocks reminded investors they lack viable alternatives to bonds. The market is not panicking and nor is Japan's bond bubble bursting just yet.
Oh, but remember, Japan is unique. So maybe there is no need to worry about any of this.