No time for squabbling
A family in trouble shows typical signs. For example, the father and mother do not get along. Similarly, an economy in trouble shows signs of fissures between the government and central bank. We have our neighbor, Japan, as a vivid example. The start of Prime Minister Shinzo Abe’s so-called Abenomics, a mix of aggressive fiscal and monetary policy to end the country’s decades-old deflation, was pretty good two years ago. Abe needed a central bank willing to print money to assist his ambitious stimulus campaign. He kicked out a governor with some years in his tenure left and brought in Haruhiko Kuroda, a former finance ministry bureaucrat, to head the Bank of Japan. The two made a perfect team. Kuroda lived up to Abe’s expectations, or perhaps his demands. The Bank of Japan embarked on a “shock and awe” mission to banish deflation by increasing the money supply until inflation recovered to a 2 percent target.
Two years after the first two “arrows” - fiscal and monetary easing - were let loose, Abenomics has produced mixed results. Stock and real estate prices jumped on ample liquidity and exports surged on a weak yen. But the benefits have not reached smaller companies and households. The fiscal deficit shot up and import prices have become expensive. Questions began to arise and so did a rift between Abe and Kuroda. Signs of trouble showed from last year and became obvious from the beginning of this year. Defying central bank etiquette, Kuroda warned that the continued expansionary campaign jeopardized the fiscal health of Japan. He warned of a spike in government bond yields due to the declining credibility of Japan’s public finances. He was referring to Abe’s withdrawal of a plan for a second hike in the sales tax. Japan’s government debt already hovers at 240 percent of gross domestic product, the highest among developed countries. Kuroda had hoped Abe would push ahead with the hike in the sales tax to help public finance return to the black in 2020-2021.
Abe, however, did not want to risk any interruption of the economic recovery, having seen the upset caused by the first sales tax hike last year. He said the second hike should be considered after April 2017. Abe’s supporters began to suspect Kuroda’s intentions and questioned his loyalty. The Japanese economy is at a crossroads. It is either headed for another lengthy depression after a temporary rebound or sustained recovery through structural reforms. The two pilots of the economy are at odds at such a critical stage. A safe flight to its intended destination cannot be assured.
We are a poorer version of Japan. Deputy Prime Minister Choi Kyung-hwan, who is in charge of the economy, and Bank of Korea Governor Lee Ju-yeol also started off well. They wined and dined while attending the annual finance ministers and central bank governors meeting of the G-20 in Australia last September. Choi talked liberally about interest rate cuts. Lee responded with three cuts in interest rates, sending the basic policy rate to the historic low of 1.75 percent. Some attributed the rare harmony between the finance ministry and central bank to the fact that both Lee and Choi attended Yonsei University.
But the thrill is gone. Earlier this month, in an obvious message to the finance minister, Lee said the fiscal sector must do its part to aid the economy. In other words, he was telling the government to do its work instead of relying entirely on low interest rates to liven up the economy. Previously he warned that people who can influence monetary policy should watch what they say.
Choi did not flinch. During the recent G-20 meeting in Washington, he demanded more from the central bank, saying monetary policy should be accommodating during hard times for the economy. He said Korea wouldn’t necessarily have to follow the United States when it begins to raise its interest rates. Lee, who was in Washington for the same event, retorted that few countries have cut interest rates three times - implying that the central bank has done enough. We cannot but worry about the economy when the officials in charge of fiscal and monetary policy publicly argue while on a business trip overseas.
The economy is in truly difficult straits and it may not weather all its challenges even if the government and central bank work in perfect harmony. Equity and real estate prices have improved, but exports are slow. Consumption remains stubbornly depressed. It is unclear whether the economy is bottoming out. Mixed signals could further confuse the economy and make it lose direction. Any help from the political sector is out of the question since it is entirely engrossed with the Sung Wan-jong bribery scandal. The stewards of the economy must be alert to pilot the economy through foggy and perilous conditions. Fiscal and monetary policy must go hand-in-hand. If they deviate from each other, the entire macroeconomic policy could flop. Trust, respect and understanding are what economic policy-makers need in order to navigate the economy in harsh conditions.
JoongAng Ilbo, April 23, Page 34
*The author is an editorial writer of the JoongAng Ilbo.
by Yi Jung-jae
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