Stable course makes Japanese economy 'steady as she goes'

For nine years now, Japan has not had a recession. Growth has been relatively steady. The inflation rate has been falling, running this year between 2 and 3 percent. Interest rates are relatively low, and the yen over this long span has become stronger.

What's the secret?

According to Yoshio Suzuki, a Japanese central banker and an economist, one key element is a steady monetary policy.

Just as American businessmen have been learning some better management skills from Japanese executives, Mr. Suzuki believes the Federal Reserve System would benefit by copying the practices of the Bank of Japan. He says Fed officials are too fond of ''fine tuning'' monetary policy.

Suzuki recalls that economist Milton Friedman, during a visit to Japan, once said that the Bank of Japan was monetarist in practice and not in rhetoric and that the Fed was monetarist in rhetoric and not in practice. Dr. Friedman is the leader of the monetarist school of economics, which emphasizes the importance of a steady, modest growth in the economy's money supply as a means of taming inflation and the business cycle.

The story of Japan's adoption of a basically monetarist monetary policy goes back to the quadrupling of crude oil prices by OPEC in 1973-74. Alarmed at the prospect of a recession, Japan pumped up its money supply dramatically. The result was 21.8 percent inflation in 1974. The economy slumped badly, by Japanese standards, to 0.0 percent growth.

''It was a bitter experience,'' Suzuki recalled in an interview. At that time he was on the staff of the Institute for Monetary and Economic Studies in the Bank of Japan. (Since March of this year he has been director.)

Mr. Suzuki, who had read and admired the works of Dr. Friedman and also, interestingly, of James Tobin, a liberal Yale economist, prepared a study advocating a policy of steady money growth.

That policy was accepted by the former governor of the Bank of Japan, Ryoichiro Norinaga, and, after his appointment in December of 1979, the current governor, Haruo Mayekawa. The policymaking bodies of the bank also went along.

''I am very lucky,'' Mr. Suzuki said.

Much of the Japanese financial community also came around to supporting the bank's monetary policy after Japan's economy weathered the 1979 boost in OPEC oil prices beautifully.

For anyone aware of the fluctuations in key economic statistics in the United States, the Japanese numbers are remarkably stable. Real gross national product - the output in volume of goods and services - has since 1976 increased between 3 percent and a little over 5 percent. That doesn't match the 10 percent annual growth rates of the 1960s and early '70s, when Japan was catching up on other industrial nations.

As an article in the OECD Observer notes, however, ''its growth still compares very favorably with that experienced by - or projected for - other OECD countries, similarly buffeted by the oil-price and other shocks.'' The OECD, the Organization for Economic Cooperation and Development, is an international organization of noncommunist industrial nations.

In Japan's fiscal year that ended March 31, real GNP grew 3.5 or 3.6 percent, somewhat slower than the US, Canada, and Turkey among OECD members. This year, the consensus forecast calls for growth of 4.5 to 5 percent.

Inflation has come down from 9.4 percent in 1976 to 2 percent last year. Even after the second OPEC oil-price jump, Japanese prices in 1980 climbed only 7.8 percent.

Suzuki attributes that decline to an intended gradual reduction in the money supply over those years. The key monetary aggregate the Bank of Japan follows is called M-2, plus certificates of deposit. It grew 14.4 percent in 1976, 7.5 percent last year.

The Japanese economist says he tells his ''colleagues'' at the Fed that they need not care about fluctuations in the weekly, monthly, or even quarterly numbers on money-supply growth. The crucial factor is keeping growth steady over a longer period, he maintains.

In fact, a look at Japanese monthly money supply figures shows a very steady growth rate in recent years. This would cast doubt on the claims of some Fed officials that it is extremely difficult to maintain stable money growth.

To do this, the Bank of Japan permits interest rates to vary considerably as the demand for money changes. Short-term rates went to 13 or 14 percent after the second oil shock. But Mr. Suzuki figures that steady growth in money reduces the variability of rates in the long run and minimizes the damage to the economy. Short-term rates are now about 6 percent and long-term, 7 percent, far below those in the United States and most other industrial nations.

In the US, after October 1979, the Fed said it would control money growth more carefully and let interest rates fluctuate over a wider range. Interest rates did jump to record highs; but money growth also varied sharply.

Mr. Suzuki concludes that the Fed has changed its fundamental monetary stance ''too often. I don't think that is the way to manage monetary policy.''

You've read  of  free articles. Subscribe to continue.
QR Code to Stable course makes Japanese economy 'steady as she goes'
Read this article in
QR Code to Subscription page
Start your subscription today