Monetary Policy:

 Macroeconomic Trends


Tetsundo Iwakuni

Director-General, International Department

The Democratic Party of Japan

Member of the House of Representatives


Presented at HPAIR 2009 Business Conference

Tokyo, Japan

August 8, 2009


I would like to express my sincere appreciation to the distinguished members of the Organizing Committees of Harvard University and Waseda University, as well as the sponsoring corporations and their staff.  It is indeed an honor to be able to participate in this conference and to exchange ideas with veteran colleagues and students alike.


I would like to begin with an observation:  This April in Prague, the American President, BARACK OBAMA, made an unprecedented speech.  As the president of the only nation that has used atomic bombs, he acknowledged responsibility for the tragedy of Hiroshima and Nagasaki, and declared the first step towards denuclearization by the United States.


This conference opened on August 6th, or Hiroshima Day, on which the first weapon of mass destruction, the atomic bomb was dropped on the city of Hiroshima.  This conference will end tomorrow, which marks the day on which the second atomic bomb destroyed the entire city of Nagasaki.  I find this lends significance to the purpose for which we gathered here for this conference, for it is a reminder that our discussion of financial policies and economic development can never lose sight of the fundamental purpose – which is a peaceful civil society that values human life and fosters human dignity in all endeavors.  


Throughout my experience, first in the financial world and then in the political arena, one of the most fundamental lessons I have learned is that economic development and financial policies can only succeed if premised on peace and security in all regions.  With this in mind, I wish to present four proposals for the future of macroeconomic development.  These recommendations are based on those I have presented in the Japanese Parliament over the last few years.


In order to clarify the purpose of these proposals, I would like to present a brief overview of our recent capital markets°« history.


Two years ago, in the summer of 2007, the central banks of the Western countries found themselves faced with the threat of both recession and inflation, thus creating the dilemma of whether to accept recession – by increasing interest rates – or to accept the risk of inflation, by decreasing interest rates.  In other words, it was a trade-off – between a rate increase or a rate cut – a tough choice, between recession or inflation.


The U.S. Government and the FRB°«s response was °»helicopter money,°… a concept introduced by Milton Friedman, referring to the °»supply of capital to households and corporations as if dropping money on people from a helicopter.°…  Although this would increase nominal government expenditure, it would decrease the real value of national debt.  In essence, the claim was that °»helicopter money°… would infuse much needed capital into the economy, without worsening the debt balance, or without making it necessary for excessive tax increases.  

Indeed, when we are faced with the imminent threat of deflation, as we now are, this concept might appear quite attractive.  However, in my opinion, such a policy serves only as a stop-gap solution – much like pain killers or energy drinks – and, as such, is neither a sustainable, nor a fundamental, solution.


Furthermore, the FRB°«s current buyback measures are likely to cause its assets to further expand ever more rapidly and if these include a large proportion of high-risk assets, it may eventually become necessary to infuse the central bank with °»public money°… – in other words, taxpayer money – thus making future tax increases unavoidable.


Another point to consider:  In my view, it would not be an overstatement to assert that the FRB, for all practical purposes, assumes the role of the °»central bank of the world.°…  This is because since last September, FRB began its full-fledged commitment to supplying US dollars by concluding currency-swap agreements with other central banks.  However, it is also a fact that such an unlimited supply of funds will inevitably cause a serious damage in confidence in the dollar°«s credibility as a key currency.


What if all such market stabilization efforts led by FRB, together with other governments and central banks, should fail?


This threat is readily evident in the economic forecasts for this year and next year, such as those issued by the OECD.




We can surmise that unless financial policies facilitate the global flow of funds and succeed in regaining stability and security in the markets, corporations will hesitate from taking aggressive action, resulting in stagnation in terms of future investments, inventory of raw materials, and employment.  


This, of course, is not the first time we are faced with a worldwide financial crisis.  

I imagine most of you were still too young to remember the financial crisis of 1987, but I recall it quite vividly.


It was October 19th, 1987.  A Japanese Diet member was paying a visit to the Corporate Headquarters of Merrill Lynch in New York, and I was showing him to the Trading Room on the fifth floor.  Precisely at that moment, the unbelievable news that the Dow Jones closed down 508 points caught my eye.  It was the sharpest decline in history.


This day came to be known as °»Black Monday,°… a day which brought about panic not only to Wall Street for the first time since 1929, but also to equity markets around the world.  The New York papers reported this news with equally ominous headlines as:  °»Crash – The Worst Day on Wall Street,°… °»Panic – Bottomless Drop,°… or °»Massacre on Wall Street.°…


But what, exactly, did °»Black Monday°… represent?  And how was it different from the Great Depression?


To use the Merrill Lynch headquarters building as an analogy, it was as if the money had basically decided to relocate – it disappeared from the stock trading floors on the fifth and sixth floors, and rode the elevator to the seventh and eighth floors to reappear on the credit market trading floors. In other words, people sold their stocks to buy bonds.


During the Great Depression, the money didn°«t ride the elevator.  The money ran right out of the building and away from Wall Street altogether.  The money also ran away from banks.  At that time, the commercial banks were also functioning as investment banks, so as soon as the stock prices went down, customers, fearing the consequent bankruptcy of the banks, withdrew all their money.  These °»bank runs,°… in conjunction with the stock market crash, thus triggered the Depression.


One of the main reasons why the money did not disappear completely from Wall Street in 1987 was that after the Great Depression, the commercial and investment functions of banks were separated.  As such, investors, while fearful of the stock market, still felt secure placing their money in banks and the bond market.




This brief overview of economic history will serve, I hope, to place the following proposals into perspective.


I.  First – I propose a shift from °»De-regulation°… to

 °»Re-regulation°… in financial policy.


One major reason for the extent of wide-spread turmoil caused by the Lehman shock was that, due to °»de-regulation°… policies, investment banks were no longer sticking to their primary role of giving sound and fair investment advice – instead, they ended up becoming players themselves, just like their clients.  This meant that they tended to lose their fair judgment and objective views, as they were pushed by their own self-serving interests.


It is no coincidence that all of the three instances in the last two years which pushed away investors involved financial institutions: Paris-Bas, in August, 2007, Bear Sterns, in March 2008, and Lehman Brothers, last September.

Thus, de-regulatory policies that blurred the lines between commercial and investment banking, or even removed the division entirely, basically caused the collapse of the capital markets, since the private investors, who supply the capital, kept away, thereby restricting the flow of much-needed funds to the industrial corporations, thus pushing the economy toward recession.


If we are to learn at all from the past, we should therefore consider regulating the financial industry once again, such as placing back the separation between the banking and securities sectors.  In fact, we should consider even tighter government supervision than before.


II.  Second – I suggest a policy to free Japan from the tide of deflation.


I would next like to propose a policy specific to Japan, one of the world°«s major economies, and free it from a never-ending spiral of deflation.  The only country in which excessive government borrowing is choking up the financial markets is Japan.  As things stand now, as much as 20% of its annual tax revenues are used to pay back the interest alone.   


Therefore, the government should °»swap half of its debt for stocks°….  What I mean by this is that the government should issue °»stocks°…, in other words, issue the Japanese government°«s own currency, under the control of the national Parliament.  In other words, I am suggesting that the Japanese government, not the Bank of Japan, issue a separate currency.  Doing so would halve the huge interest burden, allowing the government to put funds toward stimulating the economy.


In such an extraordinary and irregular situation, a conventional, run-of-the-mill approach do not help.  Extraordinary situations call for extraordinary measures.


III.    Third – I recommend a policy to stabilize the flow of funds and

support the economic growth of every country.


One way to do so is to expand the Special Drawing Rights (SDR) issued by the IMF in order to correct the excessive dependency on any single currency – i.e., the U.S. Dollar – and to prevent the national interests or the economic situation of any one country fromdictating the world markets.  This will also serve to curve excessive speculation – and therefore, fluctuation – in currency markets.


I am not suggesting we go back to the days of the Gold Standard, but the key role of international institutions in ensuring a safety net, a sort of International Currency Network, cannot be underestimated.


IV.  Lastly – We should promote the idea of a °»Negative Interest Rate.°…


I have long been sharing the idea with students that °»Green is Green°… – that investing in the °»green°… business will produce profits of °»green paper°…, the color of the American dollar bills, in return. I have long claimed that the growing industry in the 21st century is definitely, Green Investment, i.e. the ecology-friendly businesses.


My last proposal is to introduce the concept of °»Negative Interest Rates.°…  When the leaders of the world gather and unite to prevent further global warming, and when countries around the globe are making proposals about the use of sustainable energy sources and the preservation of clear water and forests, we must ask what financial policy and financial market can do for us. What do we want them to do? What should we expect them to do?

Central banks and government-related banks could provide °»preferential negative interest rates°… as incentives for companies to come up with business plans for new investments that decrease carbon dioxide emissions.  For example, a 2% preferential annual interest could be offered for those companies that commit to reducing CO2 emissions by 20% in 10 years. By a °»2% minus interest rate°…, I mean that these companies should actually °»receive 2% annual interest°… from the financial institutions for adopting ecology friendly projects.


This last proposal re-emphasizes the point that financial policies cannot be considered in isolation from other social policies.  The goal must not just be monetary profit and growth, but the goal must be to serve the needs of ordinary individuals.


In conclusion, may I just add that during my thirty years in the world of finance, I have been convinced that it is necessary to build a healthy and sound capital market in order to stabilize the economy and tax revenues.  I feel I can state the above proposals, having experienced both the regulated and the de-regulated systems, in Asia, Europe and the United States.


You would think that de-regulation – less governmental interference – would allow for more rapid, flexible growth.  However, having briefly reviewed past global financial crises, we see that it can harm not only the financial players, but also have wider repercussions on innocent members of civil society who suffer as a result of unwise policies.  Therefore, if we are to learn anything from past history, °»de-regulation°… is not always the ideal solution, as it can also have a destabilizing effect on the economy.  


I hope that some of the ideas that were mentioned to you during these last three days will remain with you, as proposals that could work not only in the US and in Japan, but also in high-growth economies such as China and Asian countries, as methods to balance economic growth and environmental protection.