Bank of Japan, caught between Trump and a hard place, must also confront ghosts of its past
The Bank of Japan won’t shock global markets this week, no matter what rabid speculation you read in the financial pages. To understand why, let’s play a game of back to the future.
Our first stop is 1994, when Yasuo Matsushita became the 27th BOJ governor. Matsushita, who died July 20 at 92, was at ground zero of the same “deflationary mindset” that the incumbent governor Haruhiko Kuroda is still struggling to defeat.
Matsushita arrived four years after the 1980s Bubble Economy imploded, adding oceans of liquidity to a traumatised financial system.
Fast forward to Toshihiko Fukui’s day. By 2006, the 29th BOJ head felt that banks had disposed of enough bad loans and companies, and had reduced enough bloat to end quantitative easing. In July 2006, Fukui even pulled off an interest-rate increase. That step, with another 2007 increase to put the benchmark rate at 0.5 per cent, landed with a thud. Recession returned and deflation intensified.
When governor No. 30, Masaaki Shirakawa, arrived in 2008, his first act was to slash rates back to zero. It didn’t work, though, for reasons of which Shirakawa warned Prime Minister Shinzo Abe in December 2012.
Shirakawa said Japan’s deflation wasn’t a monetary phenomenon, but a side effect of glacial success in modernising the economy. He cautioned, too, that Japan’s rapidly ageing population lent itself more to waning demand than robust consumption.
Soon after, Kuroda would realise just how right his predecessor was. Five years on, the BOJ’s epic quantitative easing hasn’t gotten inflation anywhere close to the 2 per cent target. Hoarding half of government bonds and 75 per cent of exchange-traded funds did more to warp markets than revive animal spirits.
That gets us back to the future the BOJ is struggling to create - and why the two-day policy meeting ending Tuesday won’t be a shocker. The BOJ may unveil some tweaks - a recalibration of assets it’s targeting. But no fundamental changes.
Even before Donald Trump fired the first shots of his escalating trade war with China, Japan was losing momentum, contracting 0.6 per cent in the first quarter. Now the US president’s tariff arms race with Tokyo’s top trade partner has Japan Inc. reeling, and revising wage plans.
Sixth months ago, economists believed 2018 would be the year Abenomics gained traction. Years of historic BOJ easing pumping up corporate profits would finally arm executives with confidence to give long-suffering salarymen a raise. That, boosters said, would catalyse a virtuous cycle of rising wages and investment and ultimately increased pricing power.
That’s not happening for reasons that predate Trump. Granted, headwinds emanating from the White House greatly complicate the challenges faced by Kuroda in 2018.
But the real problem is the glacial pace of loosening labour markets, cutting red tape, encouraging start-ups and doing more to empower women than holding splashy gender-themed conferences.
Defeating deflation, just as BOJ leaders past warned, is more the job of politicians than monetary technocrats with fewer levers to exact change.
While politicians dither, the BOJ is stuck between a Trump White House and a hard place. That place has Kuroda anxious to wean Japan Inc. off the excessive stimulus of the last quarter century. And yet he’s limited by the same forces that stymied his predecessors.
Kuroda, of course, faces an additional challenge: a fast-rising China, whose influence is rewriting the laws of economics. Add to that a US leader trying to drag the global economy back to the 1980s when trade wars might’ve worked.
But Tokyo must heed its own past lessons to engineer the more vibrant future its 127 million people crave. Those lessons will be very much on display at central bank headquarters this week.
William Pesek is a Tokyo-based journalist and author. He has written for Bloomberg and Barron’s