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Sunday, June 01, 2003

Beware the Dreaded Mr Yen

It seems there are more deflation doubters, doubters that this is simply monetary. Welcome to the world of Mr Yen. In dismissing his views, we wouldn't be running the risk of ethno-centrism, now would we? Oh, never mind........

'Mr Yen' proclaims new era of deflation

Japan is the forerunner in a global shift from an era of structural inflation to one of structural deflation, according to Eisuke Sakakibara, the former vice-finance minister who is still referred to as "Mr Yen".Mr Sakakibara, now a professor at Keio University, said in an interview that Japan had been the first economy to fall into chronic deflation but that the US and Europe were likely to follow. Whether the consumer price index fell below zero depended on factors such as the price of oil, but was essentially beyond the power of monetary authorities to prevent, he said. "Even if we don't yet have [global] deflation, you have to concede that we have disinflation," he said, attributing falling prices to rapid productivity gains in manufacturing, particularly in China. "Deflation is a structural, not a monetary phenomenon."

"Alan Greenspan never used the word deflation," he said, referring to the chairman of the US Federal Reserve. "He called it an increase in productivity. But it's the same thing." On currencies, Mr Sakakibara said that calls for the weakening of all three currency blocks - the dollar, the yen and the euro - were dangerous. If governments started taking unilateral action to weaken their own currency, it could lead to competitive devaluations, protectionism and growing hostility. He foresaw a continued strengthening of the euro as funds flowed out of the dollar, but a stabilisation of the yen in the ¥116-Y121 range.

In calling deflation structural, Mr Sakakibara is part of an increasingly vociferous intellectual movement that thinks Japan has been unfairly blamed for failing to tackle deflation with conventional monetary policy. The Bank of Japan, he said, had vastly increased money supply but this had merely fuelled a bubble in the government bond market, in which interest rates on 10-year JGBs have dropped to 0.575 per cent. Credit had shrunk. Robert Feldman, chief economist at Morgan Stanley, has also argued that following classical monetary policy is inappropriate for Japan. "There's something new going on out here and I would hope the economic theorists would be able to think about it without being poisoned by what they're teaching their students," he said.

Mr Sakakabara said governments would have to learn to think of deflation differently. This new wave of price falls had more in common with that of the 1880s, associated with huge productivity gains, than with that of the recessionary 1930s, he said. "I think we must learn to co-exist with mild deflation," he said, adding that in Japan's case this would mean writing off much of the bad debt that had been built up over decades. This would require a big capital injection of funds either into the banks or into the companies themselves, he said. The existing pension system, unsustainable in a deflationary environment, would also have to be rewritten. Efforts led by Heizo Takenaka, economy and financial services minister, to force banks to accelerate the disposal of non-performing loans were suicidal, he said. They had already led to a dangerous credit crunch. "Squeezing banks and suggesting nationalisation is not the way to increase credit." Globally, governments would have to change their policy objectives, he said. "During the period of inflation, policy leaders had to avoid hyperinflation. During this period of structural deflation, we have to avoid spiralling deflation."
Source: Financial Times

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