Devin Stewart Interviews Kazumasa Iwata

May 15, 2009

Kazumasa Iwata, head of the Japanese Cabinet Office's Economic and Social Research Institute, discusses moving towards a low-carbon society, Japan's response to the financial crisis, and in terms of the U.S.-Japan relationship, the growing threat of trade protectionism.

DEVIN STEWART: I'm Devin Stewart here at the Carnegie Council, and I'm here today with Kazumasa Iwata. He is head of Japan's Cabinet Office's Economic and Social Research Institute and the former Deputy Governor of the Bank of Japan.

Thank you very much for coming, Mr. Iwata.

KAZUMASA IWATA: Thank you very much.

DEVIN STEWART: So what brings you to New York this week?

KAZUMASA IWATA: I am coming to New York to have discussions with the financial people and also the monetary authorities. We face a very serious problem, not only in United States and Japan, but a global problem. This is a global financial crisis—not only financial, but an economic crisis—because if we look at the world trade in volume, this decline for this year is likely to decline by 10 percent in volume. This is more serious than the Great Depression.

DEVIN STEWART: What have you learned in New York City this week?

KAZUMASA IWATA: I visited several places. I had discussions with people in Washington too, and I encountered several important people, and also had discussions at think-tanks located in Washington. Now I understand better what is going on in the United States.

DEVIN STEWART: So what is going on?

KAZUMASA IWATA: Looking at the current movement, notably on the resolution of the financial market problem, to fix this financial problem, this is very important, not only for Japan and also the United States, but globally a very important issue.

DEVIN STEWART: So what is Japan's current response to the global financial crisis?

KAZUMASA IWATA: Just in the face of this global financial and economic crisis, our government announced already in the last year three economic package measures. The total amount of money used by these package measures is about 2 percent of our nominal GDP [Gross Domestic Product].

In April we announced a new policy package measure, and the total amount of fiscal money is about 3 percent. Together, if we combine the past three package measures, we have slightly more than 5 percent of nominal GDP. These are rather large stimulus measures, almost comparable to the U.S. fiscal policy measures adopted by the new administration.

DEVIN STEWART: Do you feel it's going to be enough to stimulate growth in Japan?

KAZUMASA IWATA: When we announced these new policy package measures, our primary concern was to prevent the sharp decline of economic activity in Japan. In the other sense of our new package measures, market participants expect further decline of economic activity and the international organizations made a forecast.

Japan was not the origin country of this financial problem, but our GDP, for instance in the fourth quarter of last year, experienced about a 12 percent decline in its annualized rate of change. I find that a little bit of a pity. Japan is a big country but suffered most seriously among advanced economies.

Our intention to announce these policy package measures is to prevent the sharp rise of the unemployment rate. Currently, there is a 4.4 percent unemployment rate. This is not so high by international standards. But by historical standards this is not so low. The past peak of our unemployment rate was 5.5 percent in the year 2002-2003.

This time market participants are now afraid of the possibility of exceeding this past peak of unemployment rate. Our intention is to prevent a situation where our unemployment rate exceeds this past peak of 5.5 percent.

DEVIN STEWART: Now, I've heard forecasts as high as 6-8 percent for Japan's unemployment rate. What do you make of that number?

KAZUMASA IWATA: In the absence of these policy package measures, there is a possibility of widening out the gap, which will bring about upward pressure on the unemployment rate. We should avoid reaching an unemployment rate of around 7 percent.

DEVIN STEWART: In the past, you have been sometimes against the status quo on Japan's monetary policy. You have disagreed with your colleagues from time to time. How do you see Japan's current monetary policy? Do you agree it's on the right path?

KAZUMASA IWATA: The Bank of Japan is now embarking on a credit-easing policy and is putting more emphasis on the credit side. But at the same time, we should look at the balance sheet of Bank of Japan.

During the period of quantitative easing policy that was adopted between the period 2003-2006, Bank of Japan's balance sheet increased significantly. The size of the increase, in terms of nominal GDP, is almost comparable to the current U.S. Federal Reserve's balance sheet increase. But the speed is different. In the case of the United States, the speed of expansion of the balance sheet was much more significant, much higher, but the size of change was almost comparable.

Now the current situation in Japan at Bank of Japan, also not only embarking on this credit-easing policy, but actually the balance sheet expansion, implies a quantitative easing policy. I find this is a common tendency among major central bankers in the advanced economy.

DEVIN STEWART: But now would you say that Japan's banking sector is fairly healthy, relatively speaking?

KAZUMASA IWATA: Compared to during the past. We had a big problem in the past, the so-called lost decade where our non-performing asset ratio was rather high on the balance sheets of banks. But we succeeded in reducing this non-performing asset ratio significantly and our banking sector became quite sound and strong. At this time, too, the loss incurred by the financial institutions is much less compared with that of European and United States institutions.

DEVIN STEWART: So, speaking of the United States, and the United States and Japan, and the financial crisis, what can the United States learn from Japan's experience?

KAZUMASA IWATA: In light of ongoing developments in the United States, for instance now the U.S. is embarking on a stress test. There have been discussions of a new program, the so-called PPIP [Public Private Investment Program]. I find the capital injection, of course, to be a very important issue, but simple capital injection is not sufficient. We should add several conditions to carrying out this capital injection.

First of all, we need strict examination of the assets on the balance sheets of the private banks. This is essential to making the capital injection successful.

In the case of Japan, in 1998 we had the first capital injection. We had provided 1.8 trillion Yen. But the effect was so limited because of the absence of strict examination of the assets. But it is better. Therefore, I would recommend that, in the U.S. case, it is absolutely necessary to carry out a strict examination of the assets of the banks.

I find there are good steps taken by the authorities in the States to embark on the stress test. That would make clear the actual situation of the balance sheets of private banks. This is the first condition.

The second condition is, by injecting capital into private banks, we have requested the private banks to set targets to reduce their non-performing assets within a limited time.

In the case of Japan, in 2002 there was a program, and we requested that banks reduce their non-performing asset ratio by half within three years. This is a quite important element too, because it is absolutely necessary to convince the taxpayers to use public money. To get approval of the taxpayers, making progress on this problem is very important. Therefore, request the private banks to set targets to reduce the toxic assets. This is the second condition.

The third condition is to prevent the credit crunch on the financial market. In the Japanese case, we have also requested that the private banks please maintain credit, notably to smaller enterprises. This is an absolutely necessary condition.

The final condition is the authorities should prepare sufficient money to accommodate the needs.

DEVIN STEWART: Fiscal authorities?


DEVIN STEWART: Is the United States headed for a lost decade?

KAZUMASA IWATA: I would say the U.S. should avoid the lost decade. Japan currently faces another risk of the lost decade. We want to avoid it.

DEVIN STEWART: But will it? What's your prediction?

KAZUMASA IWATA: We can avoid it by announcing new policy package measures. We want to avoid it, and I believe we can.

DEVIN STEWART: You know, a lot of gloomy news is coming out of Japan's economy right now: joblessness, even a trade deficit this last quarter. Very, very unusual.

Now there is some talk in Tokyo about what Japan's role will be in Asia for the future. Do you see Japan having a more significant role going forward, or a reduced role? And can Tokyo serve as Asia's financial center?

KAZUMASA IWATA: The role of Japan in Asia—of course, I find we have a comparative advantage in, for instance, energy technologies and also the environment-related technologies, and we have identified in our new policy package measures three strategically important areas.

One of them is a lower carbon society. This may be common to most advanced economies, including the United States. The Obama Administration embarked on this environment issue. We attach importance to this issue and we should promote the lower CO2 emissions.

In these policy package measures we wanted to promote more energy-efficient cars, eco-cars, and we provided some stimulative measures to promote the replacement of older, quite energy-inefficient cars. I find that this is one of the very important items of our policy.

And also, we are going to promote new energy technological development by intensifying the R&D investment by the government and the private sector.

DEVIN STEWART: Mr. Iwata, I know you have to get to your other meetings today in New York. But before you go, what is the most important long-term issue in U.S.-Japan relations?

KAZUMASA IWATA: I find absolutely an important thing is to maintain the free-trade regime. The United States should play a leading role, and Japan should also make contributions to maintain this free trade.

Unfortunately, in the process of this financial market crisis, several countries adopted rather protectionist measures, which although they do not directly violate the WTO [World Trade Organization] rules, are indirectly or implicitly in violation of the free-trade regime. I find this right now unfortunate.

I find over the longer run the United States and Japan should embark on the free-trade agreement between the two countries.

DEVIN STEWART: I couldn't agree with you more.

Mr. Iwata, thank you so much for coming to Carnegie Council, and I hope to see you again soon.

KAZUMASA IWATA: Thank you very much.

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