Book review: Shirakawa, the last hard money shogun
“What will happen may be inflation, a financial bubble and the ensuing financial crisis, social discontent over worsening wealth inequalities, a continuing decline in the growth rate, or a combination of these factors. … There is an urgent need for change. I believe that it all starts with clearly recognizing where we are and where we are destined to go unless we change course. “
This is the catastrophic prophecy with which former Bank of Japan Governor Masaaki Shirakawa ends his recently published 530-page memoir, “Tumultuous Times: Central Banking in an Era of Crisis.” Although his criticisms of the ultra-low interest rate and quantitative easing policies deployed by central banks are expressed in a diplomatic and never personal manner, it is clear that he thinks we are all going to go to hell in this. trash can.
Not only does unconventional monetary policy fail to cure the evils of the developed world, but he says it actively aggravates them. Using the concept of hysteresis (persistence of a state), he suggests that abnormally low interest rates continue as demand is sucked from the future amid a proliferation of businesses and projects that would be unsustainable. at higher rates.
To understand where Shirakawa came from, it is necessary to understand the recent economic history of Japan. Just as today’s American policymakers are aware of the lessons of the Great Depression and their German peers are guided by popular memories of hyperinflation in the Weimar Republic before WWII, Japanese financial officials are forever marked by the experience of the disastrous bubble economy of the late 1980s.
The lesson learned: You don’t need hyperinflation or mass unemployment to destroy a nation’s economic well-being. A sufficiently large bubble will also do the trick. And the Japanese bubble was one for the ages, encompassing real estate of all kinds, stocks, works of art, golf club memberships, ornamental carp, anything that could be traded. When it erupted, the price of commercial real estate in Osaka, Japan’s second largest city, fell 90%. The Nikkei Stock Average has entered a 20-year bear market and has yet to regain its highs. Compared to that, other modern bubbles were like the bursting of children’s balloons at the crash of the Hindenburg airship.
Shirakawa joined BOJ in 1973 after studying economics at the University of Tokyo. The bank sent him to the University of Chicago, where he attended lectures by Nobel laureate Robert Lucas and lectures audited by another Nobel laureate, Milton Friedman. Much later, Friedman criticized the passivity of the Bank of Japan in the face of deflation.
When the bubble madness was at its height, Shirakawa was a diligent and promising staff member in his late 30s. In his memoirs, he tries to deflect the blame from the institution where he spent most of his career. Indeed, as he points out, everyone adhered to the bubble logic – politicians, businessmen, intellectuals, media, even academics and foreign journalists who have written bestselling books on how Japan was destined to overthrow the United States as the world’s leading power. Yet none of these people were responsible for overseeing the money supply and credit growth in Japan. This was the role of the BOJ, and it failed in its mission.
The loss of confidence in the authorities, including politicians and elite finance ministry bureaucrats, has been a bitter pill to swallow. The determination not to make the same mistake again took hold. When official land prices finally bottomed out in 2006, the Bank of Japan halted its quantitative easing program and raised interest rates, while the Financial Services Agency demanded stricter lending standards. . The “mini-bubble” they were determined to eradicate was an 8% increase in residential land in Tokyo, but only 0.1% nationwide. In many areas, prices continued to fall. The financial bureaucrats were leaping into the shadows.
Shirakawa took office as BOJ governor in early 2008 and experienced the global financial crisis of 2007-09 and the triple disaster of the earthquake, tsunami and nuclear fusion in Japan in 2011. Whenever some Something serious was happening, whether overseas or at home, the yen was strengthening, moving from 103 per dollar to 76 during his tenure. A strong currency is appropriate if economic conditions are favorable, but after the earthquake, the Japanese economy was on its knees. Not surprisingly, monetary policy has become highly politicized, with businessmen, politicians and private sector economists increasingly vocal in their demands for more reflationary policy.
Shirakawa held on, saying there was nothing he could do – the excessively strong yen was caused by foreign factors. He was and remains a strong advocate of fiscal tightening through tax hikes. Nowhere in his memoir does he address the fact that Japanese public debt is just the other side of Mount Fuji’s balance sheet of savings made by Japanese businesses and households.
Eventually, the inevitable happened. The public and politicians are fed up with the hair economy. Former Prime Minister Shinzo Abe reappeared on the scene with a reflationary agenda that was to become known as Abenomics and give him a record second term in power.
Almost from the time Abe won the Liberal Democratic Party leadership, the yen fell sharply in the forex markets as investors began to take into account a major shift in political parameters. Shirakawa argues, very unconvincingly, that the yen’s rapid decline to over 100 per dollar was caused by the development of the eurozone bond market crisis, not by the impending end of its own policies. hard. Never say never, but so far the yen has not returned to the nosebleed levels of the Shirakawa years.
Something similar happened in the stock market. In September 2012, just before Abe’s return, the Nikkei average was languishing at 8,870, the same level as in 1983. Within weeks, she had embarked on a bull market that continues to this day, even afterward. a tripling of the price. Importantly, the rise was not caused by bubble-like speculative excess, but by “fundamentals” – a remarkable improvement in Japanese corporate profits.
A man of principle, Shirakawa took the unusual step of resigning a few months before his tenure ended, acknowledging that he was not the man to implement the Abenomics after Abe’s overwhelming overall victory gave him a popular mandate.
Shirakawa published the Japanese version of his book in 2018, but revised it and added new sections for the English version, which contains commentary on the COVID-19 era. He modestly and insightfully writes about the limited nature of our economic and other knowledge, and makes some highlights. Basically, “unconventional monetary policy” has failed – in Japan or elsewhere – to achieve its main objective, which is to raise the rate of inflation. Is it because it has not been associated with expansionary fiscal policy, or is the structural strength of shrinking demographics the key factor in containing inflationary pressures, as Shirakawa believes? We will find out in the next few years.
According to Shirakawa, the success or failure of monetary policy can only be judged in the long term, that is, 10 years or more. There is no doubt that Japan is in a much better position now than it was in the pre-Abe years, but its opinions and analyzes are of great interest nonetheless. In fact, they are probably more applicable in the US and UK, where asset bubbles, inequality and inflation are clearly visible and could well have dire economic and social consequences. If they do, Shirakawa will have been at least partially justified.
“Tumultuous Times: Central Banking in an Era of Crisis” by Masaaki Shirakawa is published by Yale University Press.
Peter Tasker is a Tokyo-based financial analyst.