Freitag, 26. Juli 2019

Interview: Prof. Sayuri Shirai, Keio University, Japan

Sayuri Shirai is Professor of Economics at the Keio University, Japan and a Visiting Scholar to ADB Institute and former Board Member of Bank of Japan

What does it mean in practice when MMT is applied? How are MMT’s pro-fiscal policy views are justified? Where do you see blind spots? 

I am not a strong critic of MMT. They provide interesting views about how to look at the economy. They place more emphasis on taxes than interest rate adjustment to contain demand-driven inflation. They believe in government expenditure rise or a tax cut as a way to raise demand and higher wages. But a flexible usage of taxes is not an option in Japan. The details are explained below.

What would be the implication of MMT for the Japanese and/or Eurozone economy if it were to be adopted?

In the highly-progressed aging society like Japan where the ratio of population aged equal or greater than 65 years old accounts for nearly 30% (far more serious than Europe) and large labor migration is not politically and socially accepted by the society, the fiscal deficit mainly arises from aging-related expenditure (pensions, medical care, and elderly care), which will continue to grow for a long time.

The public is very much concerned about their life after retirement (the opinion survey indicates 80% of all households worry about ageing) because the amount of national pension benefits is small and the amount of benefits relative to premium payment will be smaller as compared with the current pensioners under the PAYG system (partially funded by taxes and accumulated reserves).

This is why people save rather than consume and try to save more and return debt. This contributes to low inflation. In this case, the government needs substantial expenditure and the deficit and spending may grow every year as aging progresses in order to remove people's concerns about aging and spend more.

This may lead to inflation if people believe that the government would continue the generous social security system. Then government may need to cut spending to control inflation. Knowing that, people may not consume much now. Japan's low demand is more structural, not temporary demand shortage. MMT may not solve the structural problems.

Moreover, Japan's government used to spend a lot of money for public investment in the 1990s after the collapse of bubbles with monetary easing. But mild deflation occurred. Now government spending increase is mainly aging. Many Japan's fiscal experts say that Japan already did a lot of spending and then shifted to more monetary easing.

Now more government spending again under MMT? So fiscal experts are very much worried about the massive fiscal spending.

The job guarantee system is not important in Japan due to severe labor shortage. The young are in shortage in many local areas. But the corporate productivity is low because of many SME and a shift in the economy from manufacturing to services sector (elderly care, tourism, and currently 2020 Olympic related constructions).

So many firms are not able to pay high wages. The public also does not want inflation because they already feel that inflation is too high. The situation is somewhat different from what MMT envisages.

How to deal with the effective lower bound on interest rates when conventional monetary policy has no more room to counter a new economic downturn and the use fiscal policy is restrained by stone-age fiscal rules?

BOJ did massive QE, negative interest rate and YCC. But they did not create sufficient demand and inflation. They almost run out of the tools but BOJ cannot admit it in fear of triggering the yen's appreciation. So far, the policies prevent yen's appreciation, which help manufacturing sector's profits and higher stock prices.

So additional monetary easing can be done by further deepening of negative interest rate and 10-year yield but will have very damaging impact of the fragile financial sector. Fiscal policy is also under constraint because the BOJ and government believe in fiscal consolidation is necessary.

Someday we will have current account deficit and will rely on foreign debt. So many believe in fiscal consolidation is eventually necessary. At this stage, many structural issues are postponed without conducting any fundamental reforms such as social expenditure control on aging, greater efficiency in medical care, etc.

Thank you very much.

Sayuri Shirai is Professor, Faculty of Policy Management at the Keio University, Japan and a Visiting Scholar to ADB Institute and former Board Member of Bank of Japan. Prof. Shirai is a regular book reviewer for Weekly Economist (in Japanese).

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