Free The Alchemists: Three Central Bankers and a World on Fire by Neil Irwin Page B

repair before the country could return to long-term prosperity: a banking system that was slow to write down bad loans and recapitalize, networks of industrial companies that protected each other from the brutality of global competition, a political system that wasn’t capable of making hard decisions. He seemed skeptical of the theories that academics, both inside the BOJ and from the West, offered as answers to the nation’s problems. According to some who were in policy meetings with him, he didn’t always understand other economists’ technical arguments.
    In late 1998, the interest rate that investors demanded to lend the government money rose sharply, from 0.7 percent to 2 percent for ten-year Japanese government bonds. Politicians pressured the BOJ to intervene in the bond market by buying securities in order to push rates downward. But Hayami viewed such an action as a grave threat to independence, comparing it to when the bank printed money to fund the government’s military buildup in the 1930s and ’40s, resulting in a period of high inflation. “ Purchasing Japanese government bonds can’t be an option ,” Hayami told the parliament. “It would be detrimental to fiscal discipline and generate vicious inflation.”
    Hayami, however, was willing to make more conventional interest rate cuts and use the power of communication. In February 1999, the Bank of Japan went all in on ZIRP, cutting its target short-term interest rate from 0.25 percent to 0.15 percent. (It had been 0.5 percent when Hayami took office the previous year.) The governor pledged that ultralow rates would stay in place “until there are prospects for an end to deflationary fears,” which would seem to imply a fairly long time. Yet the cut held for little over a year.
    “ To this outsider ,” Bernanke said in January 2000, “Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the unwillingness of the monetary authorities to experiment, to try anything that isn’t absolutely guaranteed to work.”
    Indeed, Hayami was eager for any excuse to get away from a low-interest-rate policy—and began backing away from the policy in the early months of 2000, when the Japanese economy did seem to be gaining some ground. “ We are getting closer to the stage where we can say deflationary concerns have been wiped away,” Hayami said in a May 2000 news conference that essentially reneged the earlier promise of a long period of low rates. The policy was formally abandoned in August as the bank hiked rates back up to 0.25 percent and then to 0.5 percent.
    When the Japanese economy slumped again, Hayami’s BOJ took a different step: quantitative easing. “The BOJ had to do something to ease, but the governor did not want to do exactly the same thing, because it would be clear that he had made a mistake,” said Ueda. So in addition to cutting rates back to zero, the bank began buying bonds to increase the amount of money in the economy, aiming for the Japanese banking system to increase the number of yen on its books from four to five trillion, a rise then equivalent to about $8 billion.
    “ The decision to end the zero-interest-rate policy was not wrong ,” Hayami said in a press conference announcing the change in March 2001. Driven by the governor’s desire to save face, the action was something that no modern independent central bank had undertaken before. Almost against his will, Masaru Hayami had pioneered a very unusual type of monetary policy—one that Helicopter Ben and the Federal Reserve would adopt a decade later to fight the megacrisis.
    “ It was a very difficult decision to make ,” Hayami told reporters in 2003. “It was the first time that this had been done. I was very unsure and even felt fear. At times like those, I would remember . . . that God is always with me, that Jesus loves me and that He sees and knows all.”
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    C entral bankers are a