Opinion | 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.