It’s time Bank of Japan Governor Haruhiko Kuroda found a new target for his monetary arrow.
Since March 2013, Tokyo’s money man has been firing squarely at deflation. Kuroda’s team controls one of Prime Minister Shinzo Abe’s three policy arrows, the other two being fiscal loosening and structural change. At the heart of Abenomics is an old samurai metaphor: shooting three arrows separately does some damage, but firing them together increases lethalness.
Trouble is, only one of the three – Kuroda’s – has been fully deployed. The fiscal arrow fell to earth thanks to ill-timed moves to hike sales taxes. The third and most vital shot — deregulation – remains largely in the quiver.
Even so, Kuroda’s policies are subduing some of the gloom and doom that pervaded the economy in 2013. Thanks to a weaker yen and increased liquidity, corporate profits are booming and the Nikkei 225 average is up 94% on Kuroda’s watch.
Missing, though, are commensurate wage gains. It’s progress that real wages in November grew for the first time in 11 months. But the minuteness of the 0.1% increase speaks to the BOJ’s dilemma. It also suggests Kuroda should stop targeting 2% inflation and begin aiming at wages instead.
The BOJ concluded a two-day policy meeting on Tuesday with no change in policy. Kuroda & Co. maintained its massive stimulus program and left its price and economic targets unchanged. And that’s a mistake.
With the benefit of hindsight, it’s clear that talking incessantly about rising consumer prices has done more to cement the “deflationary mindset” Kuroda pledged to slay than reverse it. Turns out, when you tell 127 million people who’ve learned to live with deflation over 20 years, including millennials who’ve never seen a decent raise and executives on the frontlines of weak demand, that inflation is a good thing, people hear something else. They save more and spend less.
Abe must get serious about loosening labor markets, increasing productivity, reducing red tape, catalyzing a startup boom, better utilizing the female workforce and addressing democratic challenges posed by a fast-aging population, falling birthrates and low immigration
That explains why the lowest unemployment rates in 24 years aren’t working their typical wage-surge magic. With drum-tight labor markets failing Abenomics, it’s time Kuroda worked with Abe to target higher incomes.
Soft wages are a global phenomenon, of course. US President Donald Trump’s recent tax cut is probably no match for rampant competition from China and the rest of the developing world, declining union membership, weak productivity and other headwinds. The traditional laws of supply-and-demand, and what economists call “wage-push inflation,” are breaking down everywhere, not just in Tokyo.
Still, there are steps Kuroda and Abe can take to improve Abenomics’ aim. One is cajoling corporate Japan into sharing the more than US$2 trillion of cash sitting on balance sheets with workers. Tokyo, for example, could announce a tax on excessive yen hoarding. It also could roll out tax incentives for companies that open their wallets in creative ways, perhaps those offering big bonuses and inspiring greater innovation.
Legislators could empower the BOJ, meanwhile, to punish banks using BOJ liquidity to hoard government bonds rather than lend. That robs Kuroda of the so-called multiplier effect that makes central bankers so powerful.
Abe would increase Kuroda’s firepower by deploying the other two arrows. On the fiscal side, a moratorium on future consumption taxes would help. So might a review of giant public works projects to divert greater stimulus to rural Japan, instead of just Tokyo and Osaka. Abe must get serious about loosening labor markets, increasing productivity, reducing red tape, catalyzing a startup boom, better utilizing the female workforce and addressing democratic challenges posed by a fast-aging population, falling birthrates and low immigration.
To get Abenomics firing on all cylinders, Kuroda and Abe must first brainstorm on what they should be firing at. Targeting inflation alone isn’t getting the job done.