Unmaking the Japanese Miracle: Macroeconomic Politics, 1985-2000

Recently I have read the following book. Its main points are:

Book title:  Grimes, William. 2001. Unmaking the Japanese Miracle: Macroeconomic Politics, 1985-2000. Ithaca and London: Cornell University Press.

Main points:

Ch. 3- this chapter begins with fiscal policy, then turns to monetary policy, and finally to exchange rate management. The central contention in fiscal policy was the national budget. The first step in understanding Japan’s fiscal policy is to consider the general account budget. (74)

- the tools of the BOJ are essentially the same as those available to other central banks. They include manipulation of the discount rate, interbank market and reserves policies. (94) The basic operational goal of the BOJ included stable prices, sustainable economic growth, stable currency, the integrity of the financial system, and organizational autonomy. (98)

Ch. 4.-in the name of reducing international imbalance, the Japanese government was pressured to allow the yen to appreciate rapidly and to promote domestic demand. It responded with a policy mix that was fundamentally unsound and set the stage for the bubble burst. (108) To understand that response, we had to look at the domestic policy-making structure. The period could be broken down into four phases. From spring 1985 to the year end it emphasized on lowering the level of dollars through foreign exchange market intervention. Second, from January to June 1986, ad hoc monetary policy emerged as the centerpiece of international coordination effort.  From July 1986 before the Louvre Accord in February 1987, more bilateral US-Japan coordination began. From the Louver Accord until the end of 1987, there was a shift to coordination of domestic demand management. (108)

- in November 1980 voters in the US elected Ronald Regan on a platform of tax cut. The experiment, known as Reaganomics, began with unprecedented tax cuts accompanied by increased in government spending.  Coupled with the anti-inflationary program, the result was high interest rate drawing massive foreign investment and raised the value of the dollar. (109)

- analysts of the Plaza-Louvre period (1985-87) had used a variety of theoretical perspective to explain Japan’s action in the period. Each of this perspective offered some insight, but no satisfactory explanation could be made without considering the structure of Japanese macroeconomic policy making. Only by combining domestic structure with internal and external pressure were we able to come up with a consistently satisfactory explanation (127).

- the primary problem facing policy makers in 1985 were ‘bring down superdollar’. Recognizing that the US dollar was much overvalued, a cheaper dollar was needed to reduce current account imbalance. (127)

- looking at events from a two-level perspective suggested that the ultimate failure of the Louver strategy was that international-level commitments exceeded what domestic actors were willing to accepted. (134) On the Japanese side, we again saw the reluctance of MOF to use the fiscal policy tool, and its ability to block politician from using it. (135)

Ch. 5.-the year 1988 opened with a weak dollar and a lack of consensus among the G-7 countries on questions of coordinated action. 1988 saw a stabilized dollar against the yen. (136)

- much of the prosperity of the late 1980s was based on a speculative bubble. The bubble was fueled by rapid increase in the money supply caused by the continuation of BOJ’s low interest rate policy until May 1989, at least a year beyond the point at which it had ceased to be economic justifiable (an over-short).(137)

-monetary policy both encouraged and ended the bubble, but it was not able to put the economy back on track. This chapter examines both the economic policies that caused prosperity and then led to disaster, and the macroeconomic policies behind them. (137)

- in December 1989, governor Sumita of BOJ ended his term; he was replaced by his deputy Mieno Yasushi. Mieno was a BOJ careerist. Almost immediate, he acted to raise interest rate for the third time in seven months. (142) Mieno’s proposal angered the powerful Finance Minister, Hashimto Ryutaro, who exercised his legal prerogative to postpone any change in the discount rate. But the market situation forced Hashimato to drop his position. BOJ under Mieno would raise interest rate twice more. The last of the rate hikes was striking, coming as it did in the middle of a rapid decrease in stock prices on August 30, 1990; the Nikkei has fallen to 26,000 from the level of over 33,000 in early June. (142) These rapid rate rises were the monetary equivalent of driving a truck into a brick wall. (143)

- despite the BOJ’s aggressive reversal of its bubble-bursting policies of 1989-90, the growing financial mess proved difficult to reverse. The fall of asset prices had led to a large increase in bankruptcies. (148)

- politicians were increasingly frustrated, one sign of this was LDP kingmaker Kanemaru Shin’s widely reported comments in February 1992 to the effect that “the discount rate should be lowered even if it means the PM firing the governor of the BOJ”. (149-150)

(to be continued)