Bank of Japan’s attempt at reflating the economy is getting trumped by US trade war threats

In his 63 months helming the Bank of Japan, Haruhiko Kuroda has run into many an obstacle: frugal consumers, testy politicians, skittish corporate executives, assertive currency traders. But the mercurial US president may trump them all.

It’s not like Governor Kuroda’s historic easing programme was gaining great traction when Barack Obama was in office. Even today, inflation is, at best, halfway to Tokyo’s 2 per cent target.

But 513 days of the Donald Trump administration are proving to be quite a downer for the BOJ’s policy quest.

Kuroda didn’t blame Trump on Friday, when the BOJ left interest-rate policy on hold. But the US leader’s bluster was written between the lines in bold font.

Take the about-face Kuroda made between early April and Friday. Back then, Kuroda was floating trial balloons about exiting the BOJ’s quantitative-easing experiment. By June 16, though, Kuroda’s 180-degree turn away from withdrawing stimulus was complete. The BOJ even scaled back its inflation view yet again - to as low as 0.5 per cent.

Among the biggest changes in the global environment informing that view change: Trump’s currency and trade policies.

US Treasury Secretary Steven Mnuchin spent recent months warning markets that Washington’s 23-year-old strong dollar policy is dead. On the campaign trail, Trump complained the dollar is “too strong” and “killing us.”

On April 16, he slammed China and others for “playing the currency devaluation game as the US keeps raising interest rates. Not acceptable!” In other words, do not bet on a rising dollar.

Trump’s tariffs are an even bigger threat. For five-plus years now, Prime Minister Shinzo Abe worked with Kuroda to boost Japan Inc’s profits to empower corporate giants to fatten paychecks. That trickle-down strategy didn’t work from 2013 to 2017. Last year, for example, real inflation-adjusted wages fell 0.2 per cent.

This year, though, was set to be the one in which Abenomics finally secured a sizeable raise for Japan’s long-suffering salarymen and women. Trump’s nascent trade war is spoiling the mood. First came tariffs on steel and aluminium of 25 per cent and 15 per cent respectively.

More recently, threats of a 25 per cent tax on auto imports. As Trump throws grenades at the global trade system, Japanese chieftains may be less inclined to share the wealth with workers.

Top-down Japan Inc loves a precedent, and none is buzzier than calls made in Toyota City. Japan’s premier carmaker has been a leading beneficiary of Kuroda’s weaker yen and Abe’s fiscal stimulus. Unions hoped Toyota would agree to a 3,000 yen (US$37) monthly pay gain. Instead, Toyota will increase base salaries by 1,300 yen per month.

Kuroda & Co. is getting trumped for reasons beyond America’s leader. Part of his challenge is structural. As Kuroda’s predecessor Masaaki Shirakawa warned, Tokyo’s problem is less the supply of yen in the system than uses for it. This flies in the face of Milton Friedman’s teachings.

But Shirakawa was right: the chronic weakness in pricing power is about dismal demographics and weak confidence. Elderly consumers spend carefully. Younger ones, who grew up only knowing deflation, tend to save in preparation for the next downturn.

It didn’t help, of course, that Japanese growth contracted 0.6 per cent in the first quarter. But by Friday, Kuroda dropped all pretence that 2 per cent is in sight.

April’s core inflation, excluding fresh food, slowed for a second straight month to 0.7 per cent. There is every reason to expect consumer prices to end 2018 much closer to zero than 2 per cent.

Trump’s assault on the global trading system won’t necessarily drive the No. 3 economy into recession. But when the BOJ explains the headwinds heading Japan’s way, the Trump effect is written between the lines in bold.

William Pesek is a Tokyo-based journalist and author. He has written for Bloomberg and Barron’s