Putting On The Brakes; Is Tokyo about to raise interest rates too soon?

Byline: Christian Caryl

Japan's economy is looking rosier than it has in years. Corporate profits are up. The stock market has been zipping along. Even households have been doing their part by buying more consumer products. And Tokyo real-estate prices recently moved into positive territory for the first time in years--just possibly signaling an end to the deflationary misery that has characterized Japan's economy for more than a decade.

You'd think that Japanese economic policymakers would be celebrating. Instead, they're at each other's throats. The reason for the fight is the normally austere topic of monetary policy, and at stake is nothing less than the continued health of the world's second largest economy. On one side is Bank of Japan (BOJ) governor Toshihiko Fukui and some of his central-bank colleagues, who have been signaling that, given the imminent end of deflation, it might soon be time for the bank to start raising interest rates, which were lowered to zero about four years ago to stimulate the economy. Fukui cites positive growth data and a consumer price index (CPI) that seems poised to move above zero for the first time in recent memory. On the other side are members of the Koizumi government and the Ministry of Finance, who fear that a premature monetary tightening could wring the life out of Japan's long-delayed economic revival.

In a coincidence, the tussle comes just at the moment that George W. Bush's nomination of Ben Bernanke to head the U.S. Federal Reserve looks set to trigger a new discussion about central-bank strategy in America. Bernanke is well known in Japan, for he often cited the country's economic predicament during his years of service on the Federal Reserve's board of governors.

Nobuyuki Nakahara, a leading economist and former member of the BOJ policy board, recalls Bernanke's repeatedly admonishing the bank to "continue easing monetary policy aggressively and massively." (One measure that both Bernanke and Nakahara advocated: the controversial technique of setting specific inflation targeting.) The Japanese central bankers didn't take the advice--and paid for it with years of listless economic performance. It seemed all too characteristic of a central bank whose international reputation had already been tarnished by its dismal record during the economic slump of the 1990s. Richard Jerram, ...