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Japanese Monetary Policy.

A cardinal rule of reviewing is that one not criticize authors or editors for preparing an entirely different work from the one the reviewer wishes they had prepared. But an exception should perhaps be made when a book's title is seriously misleading. Such is indeed the case here.

Japanese Monetary Policy leads readers to anticipate a critical description of contemporary Japanese monetary policy and/or a history of this policy over some extensive or critical period of Japan's economic development. We have instead a half-dozen statistical or econometric studies covering the period 1970-1990, of the sort turned out by computers with minimal infusions of human hands or minds - "artificial intelligence," if you will - following what threatens to become a standard NBER pattern. The six papers deal primarily with the nitty-gritty day-by-day operations of the Bank of Japan, by comparison or contrast with parallel procedures in the American Federal Reserve system.

The papers were prepared for and presented at an international NBER conference in Tokyo (April 1991), and approximately half the authors and co-authors are Japanese. This timing was unfortunate. While Japan's great real-estate-and-securities "bubble" had burst in the previous year, the data bases for the papers could not take account of the climatic change. For example, this reviewer hoped for enlightenment on one topic: Although the Japanese bubble in land and securities greatly exceeded in severity the American bubble of the same approximate period, Japanese financial institutions avoided the sad fates of many American Savings and Loans. Why the difference? Was it merely an unintended consequence of American insurance of S&L deposits? Was it rather a consequence of the Japanese micro-management of banks and branch offices, known as "window guidance" or madoguchi shido? Or did administrative guidance by the Bank of Japan and-or the Ministry of Finance prevail upon sounder institutions to absorb their weaker rivals, and likewise to refrain from acknowledging all the bad loans and overvalued assets in their financial statements (warding off any possible financial panic)? This volume could not answer these questions on the basis of data available when the papers were being prepared; a later conference might have done better.

Instead of answers to such pressing questions, we have several studies in less than complete agreement, centering on the importance or unimportance of something called "closet monetarism" in Japanese monetary policy during the period covered by the writers' statistics. It seems not unlikely that Yasushi Mieno, President of the Bank from 1990 to 1995, could be labelled a monetarist to a far greater extent than his predecessor, Satoshi Sumita, while the Bank's research and policy staff included at least one outstanding monetarist in Dr. Yoshio Suzuki. Writing about the 20-year period as a whole, one paper saw the Bank as leaning towards monetarism of the Friedman type, but another claims that the Bank's target variable was usually the rate of interest rather than the quantity of money, while a third finds the direction of causation as running from the real economy to the money supply, which would be the "wrong" direction of causation - in the Fisher equation of exchange, a movement from Y (or T) to M, rather than the reverse.

I close by a comment on this last issue, temporal order. Of most interest, at least to me, is not the general temporal order of changes in demand and supply of money but the counterfactual question, what would the result have been in Japan of the 1980s specifically, if the Bank of Japan had followed a monetary rule and refused accommodation to the real-estate speculators in particular? I am enough of a monetarist to speculate with some confidence that the bubble would simply not have developed and that no evil effects would have occurred instead, while the majority of my colleagues may be equally confident that the result of any credit crunch would have been panic, followed by deep depression. At any rate, the question does not seem readily answerable by the sort of statistical studies this volume has assembled, either in Japan or anywhere else.

Martin Bronfenbrenner Duke University (Emeritus)
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Author:Bronfenbrenner, Martin
Publication:Southern Economic Journal
Article Type:Book Review
Date:Jul 1, 1995
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