Tumultuous Times by Masaaki Shirakawa

Author:Masaaki Shirakawa
Language: eng
Format: epub
Publisher: Yale University Press
Published: 2021-09-15T00:00:00+00:00

THE READINESS OF SOCIETY AS REGARDS TAIL EVENTS

The Great East Japan Earthquake reminded Japan that society will ultimately make choices that determine its level of readiness to meet tail events—the small likelihood of extreme consequences. Responses will differ according to the type of events anticipated, with different responses to earthquakes, tsunamis, or nuclear accidents. There are innumerable types of tail events to be considered. Even with a narrow focus on natural disasters, it is necessary to think about typhoons and volcanic activities, among others. In recent years, we have become aware of the prospect of cyberincidents. There are also tail events to be considered in the conduct of macroeconomic policy. As has been noted in previous chapters, large-scale disruptions to the economy as typified by the Japanese financial crisis of the second half of the 1990s or the global financial crisis in 2007–9 were such tail events. Financial crises do not occur frequently, but they will happen, and when they do the costs to the economy and society are enormous. An exclusive fixation on bubbles and the risks of financial crises could lead to more restrained conduct of monetary policy that could nip the buds of both innovation and more robust economic growth. A balancing act in economic policy is analogous to the debates on tail event readiness for natural disasters like earthquakes.

The degree of acceptable tail risks—be they earthquakes, tsunamis, nuclear accidents, or financial crises and macroeconomic shock—is ultimately a choice made by a society. There is no single right answer, and responses will differ from one country to another. The defenses that can be put in place will likely differ according to the affluence of a society. Reflecting on my own experience, I am troubled by the lack of a balanced public discourse on the benefits and costs of erecting defenses against the tail events that I have lived through. More specifically, I do not believe that the tail risks in the macroeconomy and the financial system have attracted the same level of careful attention as those events whose damage can be more easily discerned. Earthquakes, tsunamis, typhoons, or nuclear accidents usually result in observed physical damage, which enable there to be debates based on relatively concrete cost assessments. Views tend to diverge quite sharply, but at least the debates balance the costs and benefits. In contrast, it is more difficult to imagine what could happen if tail risks materialize because of macroeconomic policy. With the exception of the central bank, there are few who have sufficient incentive to internalize these risks and envision a wider horizon. As noted earlier, there was a sudden outburst of calls for the Bank of Japan to directly finance the government following the Great East Japan Earthquake, even when people lashed out violently at both TEPCO and the government on the grounds they had failed to be prepared to manage the extreme consequences of the seemingly remote likelihood of these events. Given the nebulous nature of tail events in macroeconomic policy, it

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