The idea that the economy depends more on the central-bank governor than the prime minister is not controversial. Many foreign investors never fully believed that reform was the key to Japan’s future; they know that stock markets can surge irrespective of economic structure, as long as monetary policy is stimulative. It is the job of the central bank to ensure that the right amount of money is circulating so that there is stable growth without deflation or inflation. Japan is the only modern industrial economy ever to suffer from deflation, which is now in its sixth year, and many investors have blamed the Bank of Japan for failing to do its job. The result has been businesses fighting over pieces of a dwindling national income pie, as bankruptcies and unemployment rise.
Many foreign investors now believe that Fukui has stemmed the tide. He took over his job at a time when the stock market was at a 20-year low and the financial system was on the verge of a meltdown. Things have changed dramatically in the past year. Nominal GDP has picked up sharply, growing 0.9 percent in the fourth quarter of 2003. Housing starts rose by 9.4 percent in December, and passenger-car sales jumped 11.7 percent in January. Many bank stocks have soared more than 500 percent.
All thanks to Fukui? Over the past year he has impressed journalists by engaging them and avoiding gaffes of the type that made life difficult for his predecessor, Masaru Hayami. Fukui has also impressed the experts through his virtuosity in handling central-bank operations. Instead of engaging in futile debates with academic economists, Fukui simply introduced a number of new ways to put money in circulation, demonstrating that he understands what his predecessor denied: the problem in Japan is not weak demand for money (small businesses are clamoring for loans) but problems in supplying money through standard banking channels. As a result, Fukui has been praised as both a technical expert and a good communicator.
I happen to agree with the more positive outlook for the economy. But it could turn out to be an expensive mistake if investors rely too much on Fukui, or on Greenspan, for that matter. Remember, the Fed chief’s excessively loose monetary policy created a massive speculative bubble in U.S. asset markets during the 1990s, followed by a sharp downturn when tight policy pricked it.
Fukui has a similar background. He has been Japan’s leading central banker for decades and has been known inside the Bank of Japan as “The Prince” because he was tapped in the late 1960s as a future governor. Sure enough, Fukui rose quickly through the ranks, passing through key posts, such as the banking department, which he headed in the crucial late 1980s, when Japanese banks expanded their speculative real-estate-related lending. Indeed, it was Fukui who used the central bank’s infamous “informal guidance” to expand such speculative loans between 1986 and 1989, and thus was responsible for the creation of Japan’s bubble and subsequent bust. From 1994 to 1998, as deputy governor and most senior central banker (the governor was an outside appointee), Fukui was responsible for the Bank of Japan’s excessively deflationary policy, which was the cause of the long slump.
The question is: If Fukui is so good, why did he mess up in the previous two decades? Should we really place our trust in the man who was at the heart of Japan’s financial mess of the past 20 years? Why does deflation persist? Another puzzle is why the Japanese media have steadfastly refused to cover Fukui’s dismal track record. The problem seems to be one criticized by U.S. trade negotiators in the 1970s and 1980s: the old-style Japanese-press club system, still operated by the Bank of Japan. This has allowed the central bank disproportional influence on Japanese financial media.
With old-style policies of bureaucratic “guidance” still in place, the Japanese recovery is not the result of necessary structural changes, but merely a central bank prone to creating vast boom-bust cycles. We may be at the beginning of the next boom phase, and that’s the fun part. But it is clear by now what follows after this. So let the buyer beware.
