The Group of Seven (G7) meetings of the last 10 days were real downers for Japan’s Haruhiko Kuroda.
In recent years, the Bank of Japan (BoJ) governor ran a kind of mentorship program for peers, many of which confront the same deflationary forces plaguing Tokyo. Neither the Federal Reserve nor European Central Bank nor Bank of England is suffering from Japan-like price declines. But chronically weak wages are a G-7 phenomenon despite today’s rare synchronized growth cycle.
As Kuroda – five-plus years into his own battle – wonders where things went wrong, he might reflect on the warnings of his BOJ predecessor. That goes for the rest of the G-7, too.
After running the BOJ from 2008 to 2013, Masaaki Shirakawa ran aground of Prime Minister Shinzo Abe’s reflation campaign. Abe felt Shirakawa was too laid back on generating inflation. He empowered Kuroda to launch an overwhelming assault on the “deflationary mindset.”
All along, though, Shirakawa knew his successor would fail and it’s worth remembering why.
As Shirakawa warned, the chronic weakness in pricing power had nothing to do with the teachings of Milton Friedman. It isn’t about the supply of yen in the system, but uses for it. The real cause of Japan’s deflation: dismal demographics and a dearth of confidence. Older consumers, and Japan has a fast-growing number of them, spend frugally. Younger ones, who grew up only knowing deflation, tend not to spend much either.
By 2016, essentially 15 years into history’s most aggressive quantitative easing, Japanese millennials were the least optimistic of any of the globe’s major economies. That year, Manpower Group, found that even twenty-something Greeks were happier about economic prospects, and by a wide margin.
At the time, fully 37% of Japanese millennials expected to have to work until death, compared to an average of 12% among 18 other nations. At the time, only 15% of Greeks expected to work ‘til the grave. Sentiment is even worse today.
Kuroda has tried to change the narrative, even pulling cultural icons like Peter Pan into the discussion. The idea being that, like flying, reviving prices is all about confidence and expectations. Only it’s not, as Kuroda and Japan’s 127 million people are learning.
“Inflation,” Kuroda admitted in Whistler, British Columbia, where G-7 finance officials met the other day, “has recently shown some weaknesses.” His use of “recently” suggests the BOJ is still trapped in happy-talk fantasy mode.
That is especially so as US President Donald Trump tosses grenades at global trade and proposes 25% tariffs on auto imports. Good luck getting Toyota, Nissan, Honda and others to avoid wage cuts in such an environment, never mind gains.
The answer, and the lesson for G-7 peers, is that monetary policy –- or excessive stimulus in general -– won’t work in today’s globalized world. Thanks to the porousness of markets, the assets central bankers hope to influence aren’t financially monogamous, if you will.
Most BOJ, Fed and ECB liquidity is spirited overseas via “carry trades.” In Japan’s case, punters borrow cheaply in yen and reinvest cash in New Zealand debt, South African stocks, Indonesian rupiah, Hong Kong properties, derivatives on New York exchanges -– not in Japan.
It’s far more important for governments and fiscal policymakers to get under economies’ hoods. Reviving animal spirits requires structural moves: making it easier to start businesses; tweaking taxes to incentivize risk-taking; infrastructure projects sure to pump energy into local economies; productivity-enhancing education and training.
In other words, trickle-up economics as opposed to the old-school trickle-down type on which Abe, Trump and others rely.
The trouble, of course, is that as Japan offers lessons to peers, it has yet to internalize them. If Tokyo had, Abe wouldn’t have placed all of his proverbial eggs in the BOJ’s basket.
Because Japan is still treating the symptoms of deflation, not the causes, Kuroda is left turning up to G-7 meetings empty-handed. Just as his predecessor predicted.