‘Whatever it takes’ indeedProfessor emeritus of economics at Yale University Koichi Hamada, who is regarded as the most promising candidate among Japanese to grab the Nobel Prize in Economics, is the mastermind behind the so-called “Abenomics” pursued by Prime Minister Shinzo Abe and his cabinet to kick-start the economy through ultra-loose monetary policy and fiscal stimuli. Just as British economist John Maynard Keynes shaped macroeconomics of the 20th century through his landmark publication “The General Theory of Employment, Interest and Money” in 1936, Hamada - born in the same year - has been studying Japan’s “lost decades” of stagnation and economic perils that continue until today and concocting directions to persuade and guide policy makers in fighting the ailments of the deflation-battered economy.
In 2008, the veteran economist became hopeful. Masaaki Shirakawa - a student taught by Hamada at the University of Tokyo - became the governor of the Bank of Japan. Hamada believed that Shirakawa, who authored a paper on monetary policies’ positive role in fixing dysfunction in the currency market caused by imbalances in the international account, wouldn’t sit on his hands as he faced a lethargic economy dogged by an overly strong yen and deflation.
However, his hopes were dashed. To Hamada, his old pupil was a canary who forgot his “song” after conforming to bureaucratic customs and rank-and-file ways. He criticized the inactivity of Shirakawa and his central bank team in an open letter, pleading with them to recall the song to redirect the Japan’s lackluster economy through determination on the exchange rate. When that didn’t work, he included the letter in his earlier book and sent it to Shirakawa. Surprisingly, Shirakawa returned the book with a short reply that he will buy his old teacher’s book on his own.
Hamada compiled all these episodes - and his blunt criticisms against the central bank - in his latest book “America Knows that Japan’s Economy will Revive” released late last year. In the book, the teacher castigates the student for having learned nothing from him during his lectures and accuses him of being a quack with a wrong set of prescriptions for a dying patient. Last November, when Abe was almost certain to become the next prime minister, Hamada received numerous calls from him seeking advice on economic policies.
Hamada became special adviser to the Abe cabinet championing an end to the decades-long battle with deflation through active monetary easing and a weaker yen. In his new position with the government, he can wield strong influence over broad economic policies. His book laying out the recipe to reverse the tide for the Japanese economy has become the reference book for policy makers and a bestseller for ordinary citizens to boot.
With his teacher’s arrival in the cabinet, Shirakawa was forced to resign in March - 20 days before he finished his five-year tenure. Asian Development Bank president Haruhiko Kuroda was handpicked to succeed him. The long-serving Finance Ministry official has been as outspoken a critic of the Bank of Japan as Hamada for a long time. Kuroda promised to pursue bold monetary easing, both in scale and quality.
Determined to beat deflation by “whatever it takes” and restore growth, he launched a bold monetary campaign with an eye on the magical number 2. The central bank will purchase unlimited amounts of long-term bonds from the market and double the monetary base to attain an inflation target of 2 percent within two years. Also, the average remaining maturity of government bonds to be purchased by the central bank will be about seven years, more than double from the less than three previously bought. Investment confidence was being stoked even before Abe took office. Another 2 may be added to Kuroda’s target list - a 20,000 yen ($201.94) Nikkei stock average.
Kuroda faithfully stuck to the set of remedies laid out by Hamada. The economist naturally had high praise for the new governor. Using a golf metaphor, he lauded Kuroda’s ways as a player who is “aiming straight for the green instead of just laying up.”
Under the helm of Shirakawa, the Japanese central bank has also continued with monetary easing to aid the economy since the global financial crisis. But the difference between Shirakawa and Kuroda was that the former’s policies were no more than a gesture compared with Kuroda’s aggressive steps, and they failed to send a strong and clear message to the market. Again in Hamada’s metaphor, he had been a shy golfer choosing shorter strokes than he was capable of in fear of possible hazards over the hill.
The teacher and pupil have changed positions. It is now Shirakawa who sits back and aims attacks on Abenomics. He argued that the United States and Europe have failed to move prices despite years of enormous spending on quantitative easing. He also worried that excess activities undermining the central bank’s sovereignty could hurt credibility of the yen.
Time will tell who is right. Hamada may be recorded as Japans’ Keynes or Shirakawa the wise one who raised a voice of integrity while others were fooled with smoke and mirrors. At the moment, the Bank of Japan appears to be unstoppable in its monetary easing regardless of squawks from neighbor economies. Hamada has said each state is responsible for failure in its own policy. We might as well give up the hope that Japan may stumble on the way. Under the “whatever-it-takes” command from Kuroda, the Bank of Japan may come up with a year-round money printer if it has to. Instead of wailing over the cheap yen attack, we better look for a strong economic mentor and crusader of our own.
*The author is business and industry editor of the Korea JoongAng Daily.
by Heo Kwi-sik