Shadow Fed panel urges Japan to increase money growth

Asian Economic News, March 15, 1999

WASHINGTON, March 8 Kyodo A panel of private-sector economists in the United States on Monday urged Japan to continue to increase money growth to end deflation. At the twice-annual meeting held in Washington on Sunday and Monday, the six-member Shadow Open Market Committee (SOMC) welcomed the recent series of measures by the Bank of Japan and the Finance Ministry to increase money growth despite a depreciation of the yen against the U.S.

dollar. ''This is the appropriate policy for Japan. We hope they will persist until deflation ends and sustained expansion is under way,'' the panel said in a statement. The SOMC is a group of monetarist economists, who link inflation with expansion in the money supply. Allan Meltzer, chairman of the panel, told a news conference that there is room for further monetary expansion in Japan even though the key short-term interest rate has effectively sunk to zero following a credit easing by the BOJ. If the key rate dropped to zero, ''buy longer-term bonds, buy foreign exchanges, buy commercial paper, buy other assets -- hundreds of things they can buy,'' said Meltzer, an economist at Carnegie Mellon University. ''The important thing is not what they buy, but it's what they provide -- they need to provide more monetary stimulus in Japan to end deflation,'' he said. Meltzer said the Japanese government has to resist the yen's likely weakening against the dollar as a result of its monetary expansion policy. ''We believe the yen may indeed have to weaken, and the Bank of Japan and the Finance Ministry should not prevent that from happening, because if they do, they won't be able to get money growth which is needed to end deflation,'' he said. Meltzer said a weaker yen may have some short-term effects on Europe and the United States by expanding their current-account deficits, but economic recovery in Japan will be in the interest of both Japan and the world economy. On the U.S. economy, the SOMC urged the Federal Reserve to slow the growth of monetary aggregates. The panel said in a statement that the rapid money growth last year is ''inconsistent with price stability.'' The underlying rate of inflation is 3%, which is much too high, the panel said, noting that the Fed should achieve a zero rate of inflation. Current monetary policy adds to inflationary pressures and the Fed should not wait for a further rise in inflation, it said. ''The longer the Federal Reserve delays, the larger will be the losses in output and employment,'' the panel said.