Economic Activity, Prices,
and Monetary Policy in Japan
Speech at a Meeting with Business Leaders in Fukushima
Yutaka Harada
Member of the Policy Board
Introduction
Thank you for giving me this opportunity to exchange views with you and for having taken
the time to be here despite your busy schedules. It is indeed a great honor to be here today.
Please allow me to express my gratitude for your great cooperation with the business
operations of the Bank of Japan, particularly of the Fukushima Branch.
The Bank has implemented quantitative and qualitative monetary easing -- or QQE for short
-- since April 2013 and introduced various additional measures such as the negative interest
rate policy and yield curve control, all with the aim of achieving the inflation target of 2
percent.
As a result of these measures, Japan's economy has been improving. Of course, I know that
many people argue that, although the economy is said to be improving, they are not feeling
the effects of this improvement because the real economic growth rate has been just a little
over 1 percent on average recently. However, this is the first time in 16 years that the
economy has registered positive growth for seven consecutive quarters, from the
January-March quarter of 2016 through the July-September quarter of 2017.
Today, I would like to explain monetary policy measures conducted by the Bank and what
they have achieved, and then discuss what to make of arguments circulating with respect to
the purported dangers of bold monetary policy.
I. Monetary Easing Measures and Economic Activity
The Bank has implemented QQE since 2013, with the aim of achieving the inflation target
of 2 percent. As a result, the money stock and lending have been growing at a faster pace.
Moreover, due to the decline in nominal interest rates and the rise in inflation expectations,
real interest rates -- nominal interest rates minus expected inflation rates -- have declined
considerably.
What sorts of results has this had for economic activity? Chart 1 shows developments in
major economic indicators. The chart shows that production, exports, consumption, and
aggregate supply of capital goods (a proxy variable for business fixed investment) all
started to recover when QQE was introduced, or even slightly before then. However,
consumption and production became sluggish following the consumption tax hike in 2014.
This sluggishness appears to have become pronounced on the whole particularly since the
end of 2014, when exports decreased with the slowdown in world trade. Nevertheless,
economic indicators as a whole in Japan have been recovering in line with the recovery in
world trade that began around mid-2016.
Chart 1 Achievements of Bold Monetary Easing
Inauguration Introduction Consumption Expansion Introduction of Introduction of
of the second of QQE tax hike of QQE QQE with a Negative QQE with Yield
Abe Cabinet Apr. 2013 Apr. 2014 Oct. 2014 Interest Rate Curve Control
Dec. 2012 Jan. 2016 Sep. 2016
s.a., CY 2010 = 100
125
120
115
110
105
100
95
90
└ 2012 └ 2013 └ 2014 └ 2015 └ 2016 └ 2017
Industrial production Real consumption activity index
World trade volume Aggregate supply of capital goods
Real exports
Sources: Ministry of Economy, Trade and Industry, "Indices of Industrial Production," "Indices of
Industrial Domestic Shipments and Imports"; CPB Netherlands Bureau for Economic Policy
Analysis, "CPB World Trade Monitor"; Bank of Japan, "Real Exports and Real Imports,"
"Consumption Activity Index."
These economic indicators experienced ups and downs after the introduction of QQE, but
one indicator that has continued improving almost constantly is employment. Chart 2 shows
developments in the number of employees and the unemployment rate. It has been said that,
although the number of employees increased, this was limited to non-regular employees.
However, the share of non-regular employees among all employees has leveled off.
Looking at the shares of non-regular and part-time employees among all employees in the
Labour Force Survey released by the Ministry of Internal Affairs and Communications and
the Monthly Labour Survey released by the Ministry of Health, Labour and Welfare, we see
that both peaked out after the turn of 2017.
Chart 2 Improvement in Labor Market Conditions
Introduction of QQE
million
(April 2013) %
60 18
Number of regular employees
Before QQE After QQE
Number of full-time employees
16
Regular employees
Number of part-time employees
+0.6% (annualized) +2.0%
50
Unemployment rate (right scale)
14
Youth unemployment rate (age 15-24 years, right scale)
Full-time employees
40 12
-0.1% (annualized) +1.6%
10
30
8
20 6
4
Part-time employees
10
+2.3% (annualized) +3.1%
2
0 0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
CY
Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications.
Productivity Also Has Risen
Since the introduction of QQE, there has been heated debate over the importance of growth
strategy; this is because, even though employment has increased, productivity has not risen,
and economic growth will not continue without a rise in productivity.1 In fact, however,
productivity has risen, as indicated in Chart 3. Productivity shown in the chart is estimated
by the Organisation for Economic Co-operation and Development (OECD) and represents
real purchasing power parity GDP per hour worked. QQE began in 2013, yet Japan marked
the highest rate of increase in productivity among major countries from 2012 to 2016, with
an annual rate of 1.2 percent. Japan's average for the 10 years prior to this was 0.8 percent;
therefore, Japan's productivity rose even after the introduction of QQE. Moreover, the
capital-labor ratio per worker has declined.2 This means that productivity would have risen
even further if there had been sufficient investment.
Chart 3 Change in Productivity in Major Countries
U.S. dollars
70
60
50
40
France (2012-16: 1.0%)
30
Germany (2012-16: 0.8%)
Italy (2012-16: 0.2%)
Japan (2012-15: 1.2%)
20
United Kingdom (2012-16: 0.3%)
United States (2012-16: 0.4%)
10
CY
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Note: Productivity is represented by real GDP per hour worked, converted by PPP exchange
rates in 2010. The figures in parentheses show the annualized growth rates from 2012
to 2015 or 2016.
Source: OECD, "Level of GDP per capita and productivity."
When growth accounting methodology was developed several decades ago, the growth rate
of an economy's output was decomposed into capital inputs, labor inputs, and technological
progress (total factor productivity). The results obtained through this methodology showed
that the contribution of technological progress to the economic growth rate was 80 to 90
percent. I am reminded of the heated argument prevailing at the time that, despite such
results, unless new capital investment is made, new technology cannot be adopted, and thus
technological progress should include capital inputs -- namely, capital-embodied
technological progress. This argument has not received much attention in recent years;
however, it is true that, if demand does not grow, then new investments cannot be made,
and if new investments cannot be made, then equipment featuring advanced technologies
cannot be used. It is wrong to view supply and demand as being separate, and to consider
that Japan's economic problems are rooted in the supply side of the economy.3
I would like to note that monetary easing measures and growth strategy are not in
opposition to one another, but actually complement each other. What is more, deregulation
as part of growth strategy includes measures aimed at improving the efficiency of existing
industries, thereby reducing employment. On such occasions, monetary policy measures
will make it easier to carry out deregulation by improving the economy and producing labor
shortages.
The Economy Has Improved, despite Claims That People Are Not Actually Experiencing
Such Improvement
It is often claimed that, although the government says that the economy has improved, the
public is not actually experiencing this improvement in their daily lives. However, how
should we measure the public's perceptions regarding their daily lives in the first place?
Public opinion polls offer clues in this regard. Chart 4 shows answers to the following
question in a public opinion poll: "How would you describe the lifestyle of your household
compared to this time last year?"
Chart 4 Sense of Improvement in Lifestyle Compared to Last Year
% % points
100 10
90
0
80
-10
70
-20
60
50 -30
40
-40
30
-50
20
-60
10
0 -70
CY
1954 1955 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1974 1975 1975 1976 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1999 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Jan.
May May
Nov. Nov. Nov.
I do not know Deteriorated Remained the same Improved "Improved" minus "deteriorated" (right scale)
Note: This graph was made by the Bank's staff based on the Public Opinion Survey on the Life of the People
conducted by the Cabinet Office.
The surveys conducted in 1954 and 1955 asked the respondents "Have your household circumstances of late
improved, deteriorated, or remained the same compared with around this time last year?," while those
conducted between 1959 and 1991 asked "How would you describe your household circumstances compared
to this time last year? Have they become better off, worse off, or remained the same?" The surveys conducted
from 1992 ask "How would you describe the lifestyle of your household compared to this time last year?
Has it improved, deteriorated, or remained the same?" English translation of these questions was prepared by
the Bank's staff. The question is phrased somewhat differently depending on the survey year.
The question was asked only of the odd-numbered respondents in the 1971 survey, and of the
even-numbered respondents in the January 1974 survey.
The figures for the 1972 and 1973 surveys were calculated by the Bank as the average of the results for
the odd-numbered and even-numbered respondents. From the 1999 survey, the share of "I do not know" has
been calculated by subtracting the shares of all the response options from the total.
Sources: Cabinet Office, Public Opinion Survey on the Life of the People; Bank of Japan.
The chart shows that only a very small number of respondents answered that their
household circumstances or lifestyles have become better off or improved compared with
one year ago. While the proportion of such respondents is currently slightly over 5 percent,
even during the period of high economic growth between the mid-1950s and the early
1970s, when real GDP grew by around 10 percent every year, the only period when more
than 10 percent of people replied that their circumstances or lifestyles had become better off
or improved was from 1959 to 1963.4 The results indicate that people do not feel the effects
4
In the time-series data of the Public Opinion Survey on the Life of the People conducted by the
Cabinet Office, the share of respondents answering that their household's lifestyle "improved"
exceeded 30 percent during the high economic growth period. This figure, however, requires
attention because of the following. The surveys conducted between 1965 and 1991 and in 1994 first
asked "What aspects of your household's lifestyle have improved compared with around this time
of improvement in the economy. Nevertheless, looking at an indicator derived by deducting
the share of respondents who answered that their household circumstances or lifestyles have
"deteriorated" from the share of those who answered that these have "improved," it appears
to be moving very closely in line with economic developments. After rising in 2013, the
indicator fell due to the consumption tax hike, and since then it has been rising again
together with the steady improvement in the economy.
II. Arguments against QQE
As I mentioned so far, Japan's economy has been improving due to QQE, which began in
April 2013. However, there are always those who are against QQE. I consider that these
opposing views can be divided into three arguments. The first states that there is no
relationship between QQE and the current improvement in the economy, and that the
economy would have improved even without QQE. The second argument states that QQE
has produced positive effects for some people, but that it also has produced negative effects
for a number of others. The third argument is that, although QQE may be bringing about
positive results at the moment, it most certainly will give rise to extremely serious problems
in the future.
last year? Choose from among the following" (the choices were as follows: food; clothing; durable
consumer goods such as electrical appliances, furniture, and automobiles; housing; leisure; other;
and nothing has improved). The survey then asked "When viewed on the whole, do you think that
your household's lifestyle has improved, deteriorated, or remained the same compared to last year?"
(the question is phrased somewhat differently depending on the survey year). Since the question was
posed in such a specific manner, many people were likely to have answered that their household's
lifestyle has "improved," recalling, for example, electrical appliances that they newly purchased or
family trips taken that year as opposed to not taking any the previous year. For this reason, for
surveys conducted between 1965 and 1991 and in 1994, Chart 4 shows responses to "Have your
household circumstances of late improved, deteriorated, or remained the same compared with around
this time last year?" -- a question that did not ask about specific aspects that improved in their
lifestyle. The only difference in the questions is the phrase "lifestyle" and "household
circumstances." Moreover, a possible reason why only a small number of people responded with
"improved" over the years is that this question does not offer "somewhat improved" in the response
options.
The First Argument: There Is No Relationship between QQE and Economic
Improvement
Let me start with the first argument. As I have explained so far, improvements have been
seen in a number of indicators since the introduction of QQE; thus, I can hardly believe the
claim that Japan's economy would have improved even without QQE. Nevertheless, it is
difficult to technically prove my view that QQE has brought about improvements in Japan's
economy, because it is impossible to compare the situation of the economy from 2013 up to
the present between cases where QQE has been implemented and where QQE has not been
implemented. What I can compare is merely the situation before the implementation of
QQE -- that is, until 2012 -- and after the implementation -- from 2013. Because the
economic situation differs between these periods, the effects of QQE cannot be technically
proven by this comparison.
Given this, it is necessary to terminate QQE now in order to make my argument more
convincing. If QQE is terminated and the economy deteriorates, many people would believe
that the economic upturn had been driven by QQE. Nevertheless, this experiment will not
be persuasive enough because of the differing economic situations between the period
through 2012 and from 2013.
Should this experiment be carried out, interest rates will soar, the yen will jump, stock
prices will crash, and the economy will plunge into recession. Such a dangerous test must
not be carried out. In addition, it is possible without such a reckless experiment to make an
assessment that compares Japan's economy through 2012 and from 2013 up to the present
by adjusting the situation of the economy in each period to be as similar as possible. The
results obtained from this assessment show that QQE has exerted its intended effects. For
example, Professor Ryuzo Miyao at the University of Tokyo -- a former Policy Board
member of the Bank -- presented an analysis based on a vector autoregression (VAR) model
that the impact of an expansion of the monetary base raised production and the inflation
rate.5
Moreover, making comparisons of the economic situation in Japan with those in various
other countries that adopted monetary easing during different phases will support my
argument. For example, during the Great Depression, the U.S. economy recovered steadily
when it abolished the gold standard and shifted to monetary easing in April 1933, but it fell
back into recession when the level of monetary easing was reduced from 1936 to 1937.6
Chart 5 shows developments in real GNP, the money stock (M2), and prices in the United
States during the Great Depression in the 1930s. It is evident that real GNP and prices
dropped significantly in line with the decline in M2, and recovered steadily with the
increase in M2. Then, in 1937, real GNP and prices declined again as M2 decreased,
showing that it was a failure to exit from monetary easing too early. However, as monetary
easing was resumed, real GNP started to recover from 1938 with the increase in M2.
Chart 5 Real GNP, Prices, and Money Stock in the United States
during the Great Depression
billion U.S. dollars CY 1929 = 100
120 120
100 100
80 80
60 60
Real GNP (prices in 1929)
40 40
M2
Index of wholesale prices (right scale)
20 20
1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940
CY
Source: Robert J. Gordon, The American Business Cycle, The University of Chicago Press,
1986.
As I mentioned earlier, it is actually difficult to totally refute the argument that Japan's
economy would have become better even without QQE. However, by referring to a number
of cases in the past, I believe that it is now understood that it was monetary easing that
brought about the recovery in Japan's economy.
The Second Argument: The Effects of QQE Have Not Become Widespread
The second argument is that QQE has produced positive effects for some people but also
has produced negative effects for a number of others. For example, labor shortage is
certainly a favorable condition for job seekers, but it is a potential disadvantage from the
standpoint of employers. Nevertheless, I feel that it is better to suffer from a lack of people
who engage in selling, manufacturing, and transportation for a marketable product than
from the problem of a product that is not selling. If a product that is not selling comes to
pose a management crisis, it will become necessary to cut employment, which is a hard task
for managers. After the 2008 financial crisis, I heard from numerous corporate managers
that they were forced to cut their workforce and had never before had such a painful
experience. I cannot imagine that there are any managers in Japan who would find it easy to
cut their workforce. This is why I feel that it is much better to have too few people than too
many.
Some argue that only a limited number of people receive the benefits from the economic
recovery and that benefits do not reach them. This argument goes that, although income has
risen on the whole, many people do not experience much increase in income and income
disparities have expanded. Let us take a look at how income distribution changed after the
introduction of QQE.
Comprehensive Survey of Living Conditions 2016
According to the released by the Ministry
of Health, Labour and Welfare, the child poverty rate (the share of children aged 17 or
under living in households with equivalent disposable income at or below 50 percent of the
median) fell from 16.3 percent in 2012 to 13.9 percent in 2015.7 In this same survey, the
overall poverty rate fell from 16.1 percent to 15.6 percent over this period.
There is another argument that QQE has put the banking industry in a difficult situation,
saying that low interest rates are squeezing bank profits. But one of the major reasons for
such a situation is that banks are suffering from a lack of borrowers. In Japan, private
nonfinancial corporations as a whole have been experiencing excess net savings, and their
currency and deposits accumulated to as much as 254 trillion yen as of end-June 2017.8 Of
course, it is natural that bank profits are squeezed if long-term interest rates decline,
because banks generally raise short-term funds and invest them in long-term assets.
However, if we simply compare long-term interest rates and bank profits, it does not seem
appropriate to say that low interest rates always reduce bank profits.
Chart 6 shows developments in banks' operating profits from core business and long-term
interest rates (10-year Japanese government bond [JGB] yields). Operating profits from
core business represent stable earnings of banks, such as profits earned from fund
management in the form of lending and securities investment, for example. Interest rates
have fallen in a mostly consistent manner since 1990, yet I do not believe that this is
correlated with banks' operating profits from core business. For example, even though
interest rates fell in the first half of the 1990s, operating profits recovered. In 1999, when
the zero interest rate policy was introduced, operating profits rose along with interest rates.
In 2001, the quantitative easing policy was introduced, yet operating profits rose thereafter.
Both operating profits and interest rates fell following the termination of quantitative easing,
but this is largely due to the 2008 financial crisis. After the introduction of QQE in 2013,
due to the improvements in the economy, the financial situation of borrowing firms
7
Equivalent disposable income is calculated by dividing household disposable income by the square
root of the number of people in the household. It is believed to represent the standard of living per
member of the family. The reason for using the square root instead of the number of people itself in
the calculation is that there are costs of living shared among the members of the household, which
tend to become lower per person as the number of people in the household grows larger. Equivalent
disposable income is thought to make it possible to compare per capita disposable income between
households with different numbers of people in the household.
8
Bank of Japan, Flow of Funds Accounts (2nd Quarter 2017; Preliminary), September 2017.
improved, credit costs decreased, and banks' net income increased.9 In other words, bank
profits are affected by the situation of the economy as a whole, in addition to developments
in interest rates. Although operating profits from core business fell in fiscal 2015 and 2016,
I think that this is partly due to the sluggishness of the economy that followed the
consumption tax hike. It is true that banks' net profits have been declining since fiscal 2016,
but I would like to emphasize that they had been improving prior to that.
Chart 6 Financial Institutions' Operating Profits from Core Business
Introduction of the zero End of the zero Introduction End of QE Introduction
interest rate policy interest rate policy of QE Mar. 2006 of QQE
Feb. 1999 Aug. 2000 Mar. 2001 Apr. 2013
trillion yen
%
8 7
7 6
6 5
5 4
4 3
3 2
2 1
1 0
0 -1
FY
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Shinkin banks Regional banks Major banks JGB yields (right scale)
Note: Non-consolidated base. Operating profits from core business are calculated by subtracting
general and administrative expenses from the sum of net interest income and net
non-interest income. Figures for "JGB yields" represent 10-year JGB yields.
Source: Bank of Japan.
Furthermore, if bank profits depend on a rise in nominal interest rates, QQE is a policy that
will lead to an increase in interest rates in the end. This is because interest rates also rise
when prices rise. If interest rates are raised even though prices are not rising, then the
economy will deteriorate, prices will fall, and interest rates will have to be reduced further. I
believe that such policy measures continued from the 1990s until the introduction of QQE.10
Looking ahead, I believe that prices will rise, and that we can expect to see interest rates
rise along with them.
The Third Argument: QQE Will Cause Serious Problems in the Future
Lastly, let me turn to the argument that QQE may be bringing about positive effects at the
moment, but most certainly will give rise to extremely serious problems in the future. The
argument goes that, at some point, monetary easing will suddenly give rise to hyperinflation,
a collapse of the yen, a surge in interest rates, a plunge in bond prices, and so forth.11
However, such fears are not at all likely to happen. Given this, the argument seems to have
converged on the discussion that the Bank will face significant problems of making large
losses for a protracted period when it heads toward an exit from monetary easing -- that is,
when it reduces the level of monetary easing. Regarding this argument, it is of course
possible that the Bank may register losses.
Those who support this argument claim that, when the public merely acknowledges the
possibility that the Bank may register losses -- even if such a thing does not actually happen
-- the yen will collapse and Japan's economy will experience hyperinflation.12 However, if
this argument is valid, why is the collapse of the yen or hyperinflation not happening now? I
often ask this question, but have never received an answer.
10
For the relationship among nominal interest rates, financial institutions' profits, and monetary
policy, see Harada Yutaka, "Naze nihon no kin'ri wa hikui no ka," Keiki to saikuru, no. 62, Japan
Association of Business Cycle Studies, November 2016.
11
In Harada, Kataoka, and Yoshimatsu, Abenomikusu wa shinkasuru, this sort of theory is criticized
by referring to it as the "big rock theory."
12
In "The Role of Capital for Central Banks" (the outline of a speech given at the Fall Meeting of
the Japan Society of Monetary Economics on October 25, 2003), Kazuo Ueda provided the general
opinion that, when a central bank falls into capital deficiency, a loss of credibility in the central bank
causes a depreciation of the currency, a high rate of inflation, a functional decline in payment
systems, and other problems (note that Mr. Ueda is not necessarily stating this as his own opinion).
I consider that the Bank may register losses on its statement of income at the exit from
monetary easing, but believe that nothing negative will happen to the economy. I will
explain the reason behind my view.
Let us first look back in history. Since 1980, as far as I can confirm, there have been about
20 cases in which central banks recorded losses or fell into capital deficiency.13 Although
details are not available for all cases, countries that suffered from economic turmoil such as
inflation were Jamaica, the Philippines, and Venezuela in the 1980s and 1990s. On the other
hand, inflation rates did not rise in West Germany in the 1970s, the Czech Republic in the
1990s-2010s, Chile from the 1990s up to the present, or in Switzerland in the 2000s and
2010s. The reason why economic turmoil did not happen in these countries is clear. Most of
the assets of central banks in these countries are foreign assets. If inflation occurs, the value
of their countries' currencies depreciates, whereas the value of foreign assets denominated
in their home currencies appreciates. In other words, there is a mechanism in which, if
impairment of central banks' assets brings inflation, inflation itself recovers the value of
these assets. Therefore, it is impossible that serious problems will occur because of central
bank losses.
Why, then, could sharp inflation not be restrained in Jamaica and other countries? In these
countries, central banks increased money to assume government debt and issued
high-interest-bearing bonds to absorb the increased money. As a result, these central banks
made losses due to increased interest payment.14 It is a matter of course that, if central
banks issue banknotes to assume government debt, they inevitably will suffer from inflation
regardless of their financial situation. In the case of Japan, however, as I have explained on
various occasions, the fiscal deficit has been decreasing after the introduction of QQE.15
The ratio of the general government deficit to GDP has declined significantly from 8
percent in 2012 -- the level before the introduction of QQE -- to 2 percent in 2016. Of the 6
percentage point decrease, 1.5 percentage points, or 8 trillion yen, is due to the consumption
tax hike in 2014, and the remaining 4.5 percentage points is due to the economic recovery
brought about by economic stimulus measures such as QQE.16
In addition, the Bank of Japan employs a price stability target of 2 percent. This means that,
when the timing of achieving the 2 percent price stability target is in sight, the Bank will
taper monetary easing or tighten monetary policy. This situation totally differs from that in
Jamaica or other countries that experienced sharp inflation.
Why Does the Exit Pose a Problem?
As I explained earlier, in the 1980s and 1990s, the situations in Jamaica, the Philippines,
and Venezuela were completely different from that in Japan, and as for countries such as
Switzerland, central bank assets consist of foreign assets. Given this, I believe that there are
doubts over what will happen in countries where the majority of assets consist of
government bonds denominated in their own currencies, such as Japan.
"Exit" here refers to the Bank's termination of monetary easing followed by an increase in
interest rates and a reduction of the monetary base because achieving 2 percent inflation is
in sight as a result of monetary easing. At the exit, the Bank will have to raise interest rates.
By way of example, possible ways to do so are as follows: by abandoning the negative
interest rate policy currently carried out by the Bank and raising the interest rate applied to
excess reserves, or by selling JGBs held by the Bank.
At this point in time, the Bank has not reached any decisions on an exit policy. It is easier to
understand the topic by thinking in terms of hiking the interest rate applied to excess
reserves, and so I would like to explain it in this way. Those who contend that the exit will
be dangerous make the claim that, even if the Bank raises the interest rate on excess
reserves, the interest rates on JGBs that it purchased in the past will remain low, and
therefore the Bank will suffer enormous losses. It is certainly possible that the Bank could
suffer losses because it will receive a low yield despite paying out a high yield. Such
proponents explain that, if the Bank suffered losses, then confidence in the currency would
be undermined, and this would lead to hyperinflation, the collapse of the yen, and a surge in
interest rates.
However, while yields on even JGBs at present are around 0 percent, they were 3 percent
until about the middle of the 1990s. The reason is that, at that time, the real economic
growth rate was high and prices were rising. If prices rise, interest rates will also rise
eventually. This means that it will be possible to purchase higher yielding JGBs. Of course,
until that time, the Bank will have to hold low yielding JGBs while paying high yields to
banks in order to prevent an overheating of the economy. However, in the end, the central
bank will always make a profit in the long run, since it buys high yielding JGBs using cash
and current account deposits that carry almost no costs. Thus, the Bank will not make a loss
in the long run that could pose a danger.
In the first place, over the course of monetary easing in Japan, the economy improved and
the fiscal deficit to GDP ratio also improved, backed by an increase in tax revenues; thus,
focusing on the Bank's deficits that will temporarily occur at the time of the exit is an
argument that fails to see the forest for the trees.
Some are of the opinion that, because central banks in the United States and Europe are
heading for the exit, Japan should follow suit. However, it makes perfect sense to me that
Japan's exit should come later than theirs. To begin with, although inflation rates in the
United States and Europe are below 2 percent, they are hovering at around 1.5 percent. This
differs from the situation in Japan, where the rates do not reach even 1 percent. Furthermore,
Japan introduced the quantitative easing policy -- which was large in terms of scale -- in