New York Times/ Op-Ed August 13, 2000
RECKONINGS / By PAUL KRUGMAN End Of The ZIRP
We interrupt America's political silly season to bring you a special bulletin: something important and disturbing just happened in Japan.
O.K., I admit that it doesn't look important, especially to Americans. So what if last Friday the Bank of Japan finally ended its "zero interest rate policy" (yes, ZIRP)? After all, it's only a quarter-point rise, in a faraway country that doesn't interest most Americans now that it no longer seems a dangerous competitor. And yet I would not be surprised if future economic historians look back at Friday's move as the beginning of the end for an era, and not just in Japan.
For one thing, this move by the Bank of Japan is a much bigger deal than you might think, because of its potential impact on expectations. By raising interest rates, even slightly, when the economy is still depressed, the B.O.J. in effect signals anyone in Japan who might be feeling stirrings of exuberance that it is likely to step on the brakes in earnest if the economy actually shows any signs of booming, or if consumer prices start to rise even slightly.
Consider the contrast: in this country the markets expect the Fed to hold off for a while on interest rate increases even though inflation is running at more than 3 percent. Meanwhile the B.O.J. has just raised interest rates in an economy where consumer prices are actually falling, G.D.P. is lower than it was three years ago, and unemployment is at a postwar high. This says something about what kind of policy Japan can expect from its central bank in the future -- and it's not the sort of thing that would encourage people to go out and spend.
My personal guess is that in the near future, whatever optimism people are now feeling about Japan's economy will evaporate, and the nation's malaise will be deeper than ever -- thanks in large part to Friday's action. And while others are more sanguine, both the International Monetary Fund and Japan's own Ministry of Finance pleaded with the Bank of Japan not to raise rates.
So why did the Bank of Japan do it? Its officials have been talking up the need for higher rates for months, yet have never been able to provide any coherent rationale. Mainly, they claim that ZIRP makes life too easy for corporations, that it lets them put off tough decisions. But there's no evidence for this -- on the contrary, despite the zero interest rate, corporate Japan has lately been experiencing an unprecedented series of high-profile bankruptcies. And anyway, since when is it the central bank's job to strengthen the private sector's moral fiber?
Arguably, what we really have here is a newly independent central bank frustrated by the fact that in a depressed economy it has no good reason to do what central bankers like to do -- that is, preach austerity, take away the punch bowl just as the party really gets going and all that. And so, probably unconsciously, Bank of Japan officials began looking for reasons to act in central-bankerly ways. As B.O.J.-watchers have pointed out, over the past few months the bank has been systematically "changing the goal posts," finding new reasons to tighten. It looks very much like the behavior of someone who starts with the answer then goes looking for the right question. And once they had talked up the possibility, it seems, officials at the B.O.J. felt that they would lose face if they didn't raise rates -- that they had to go ahead with the move precisely because the Ministry of Finance was against it.
It's no way to run an economy -- and that is why this is a story with ramifications that extend far beyond Japan.
For we are, as I pointed out last week, living in the age of the central banker -- an era in which elected officials around the world have been persuaded to leave a key economic policy in the hands of unelected technocrats. It's a delicate balancing act at best -- even Alan Greenspan has succumbed to the temptation to overreach, to make pronouncements on policy matters outside his jurisdiction. And he at least has done well in his proper job.
Now along comes the world's third most important central bank, redefining its mission so as to justify an interest rate increase that makes no sense on conventional economic grounds -- and arguably doing so mainly in order to give itself a bigger role. Is this the beginning of the end for central bank independence, not only in Japan but around the world? ----------------------- Not! Oh yeah, "at least" Greenspan's done "well in his proper job." Give me a break.