In its haste to grab the lead in robots and artificial intelligence, Japan may be missing a grand opportunity to put its powerful central bank into the game.
Given the country’s crushing debt load, slimming the Bank of Japan’s 4,700-strong payroll, auctioning its massive neo-baroque Tokyo headquarters and closing its myriad satellite offices could plug some holes in the national balance sheet.
Replacing BOJ staff with AI is a non-starter, of course. But could software tools really have accomplished less in the past 20 years than the BOJ’s highly educated economists? Doubtful.
The BOJ has been trying to reflate the economy for decades now, intensifying the campaign greatly on Haruhiko Kuroda’s watch. Since March 2013, the BOJ governor has cornered the bond and stock markets and pumped liquidity into just about every asset group available. And still, the “deflationary mindset” Kuroda sought to change remains. A 2% inflation rate remains elusive.
There have indeed been rays of hope. In June, real wages jumped 2.8%, the biggest increase since 1997. Yet, odds are, it’s an aberrational jolt from summer bonuses at a moment of extreme tightness in labor markets. It’d be more impressive if Japan Inc. just raised salaries. Instead, it’s opting for periodic cash handouts that do far less to alter mindsets.
Here’s the most important takeaway: economists have done a 180-degree turn on predictions for BOJ tightening.
Ahead of its July 30-31 policy meeting, traders buzzed about Kuroda & Co. yanking away the proverbial punchbowl. Not with a formal interest-rate hike, but by scaling back history’s most ambitious quantitative-easing experiment. To put things in perspective: the BOJ’s balance sheet as a percentage of gross domestic product is about 98%. At the height of its QE journey, the Federal Reserve’s ratio was 20%.
Just withdraw a tentacle or two
The BOJ, it follows, doesn’t need to hike rates to slam global markets. It just needs to withdraw a tentacle or two just a little to propel the yen and government bond yields higher.
That, in turn, could blow up the so-called yen-carry trade. For over a decade now, punters from everywhere borrowed cheaply in yen and bought higher-yielding assets. It’s the financial-market equivalent of the butterfly wing metaphor: minor flaps in Tokyo would disrupt Brazilian stocks, New Zealand debt, the South African rand, Hong Kong property, Indonesian commodity prices, you name it.
It’s a big deal, then, that economists’ predictions are converging on no BOJ action all the way through 2019. In a Bloomberg survey of 42 BOJ watchers, some 57% expect steady policy into 2020. If that’s not autopilot, what is?
Sure, Kuroda’s team will tweak asset purchases a bit. One likely step involves throwing banks a bone. Negative rates are a disaster for Japan’s hyper-competitive banking sector, stymying opportunities to earn a spread on deposits. The BOJ might take steps to create a wider gap between short- and long-term debt. Still, this is finetuning, not tightening.
It makes you wonder what the BOJ’s sprawling staff will be going these next couple of years. Really, the BOJ’s nearly 5,000 staffers could be furloughed – or reassigned to a new economic-revival task force. While BOJ robots add stimulus at different intervals, the central bank’s technocrats and researchers could be seconded to a Ministry of Finance asleep at the switch. There, they could brainstorm with fiscal-policy experts on reforms that might give BOJ policies greater traction.
Focus on growth
One possibility: let’s focus less on 2% inflation and target GDP gains instead. Targeting GDP growth of, say, 4% would force politicians to accelerate structural changes, and give executives confidence to fatten paychecks and up investments.
Tokyo, in other words, must to learn from past mistakes and recalibrate accordingly. If AI can do it, why not elected officials?
This, too, will sound fanciful given the siloed nature of Japan’s economic institutions. But it’s high time Kuroda and Prime Minister Shinzo Abe’s team shook things up.
It’s even more fanciful to think policymakers currently have the tools to kick off the virtuous cycle Abenomics envisioned. Who knows, maybe robots could indeed do better.