Will the sixth year be a charm for Haruhiko Kuroda? Few questions carry greater weight in Asia as the Bank of Japan governor tries to avoid another recession.
That Asia’s No. 2 economy might be in one already might seem fanciful. Six years ago, Prime Minister Shinzo Abe set out to defeat deflation and banish the business cycle. His secret weapon: hiring Kuroda to launch history’s most audacious monetary experiment.
Kuroda seemed an inspired choice. He’d just spent eight years heading the Asian Development Bank in Manila. Kuroda’s remit there – promoting inclusive growth – seemed an asset. Who better to help the BOJ gain traction? And his past as a top Ministry of Finance official accorded Kuroda a high degree of gravitas in markets.
Yet six years on, Kuroda looks terribly short on wins.
Inflation is barely halfway to the 2% target. Wages are still walking in place despite the longest expansion since the 1980s. And the BOJ now owns more than half of the government bond market and 80% of exchange-traded funds. Its balance sheet is now bigger than the entire $4.9 trillion economy.
Moreover, Japan’s economy is slowing abruptly as trade war headwinds intensify. Exports plunged 5.2% in real terms from December; machinery orders fell 5.4%. The latest quarterly survey of sentiment among Japan’s biggest manufacturers showed a reading of -7.3, the lowest since the second quarter of 2016.
All this spells recession.
The problem, of course, is that “Abenomics” is really “Kurodanomics.” In six years, Abe pulled off none of the shock-therapy reforms he advertised in 2012. Some tweaks here and there, but nothing to recalibrate growth engines from exports to innovation and services. Abe relied too much on Kuroda’s quantitative easing and a weaker yen, and detrimentally so.
How can the BOJ turn things around? By getting transactional with Team Abe.
The betting is on Kuroda’s team pushing its monetary tentacles further into government debt and ETFs. It won’t help, though. Japan’s problem isn’t the supply of yen, but uses for all that liquidity. Bankers are more apt to sit on cash than lend it.
The missing link is a big bang that unleashes a startup boom, incentivizes companies to invent new growth industries and shakes up an atrophied corporate system. It is time Kuroda took his gravitas out for a ride and prodded the government to do its part. Why not seek a grand bargain of sorts – monetary stimulus in exchange for supply-side upgrades?
One of the best examples of this quid pro quo dynamic was in Washington in the early 1990s. Then-Federal Reserve Chairman Alan Greenspan was under pressure to loosen policy. He was reluctant to do so. Lower rates might have incentivized Bill Clinton’s White House to run up budget deficits even further.
So, Greenspan cooked up an arrangement with then-US Treasury Secretary Robert Rubin. If Clinton’s team made notable progress moving the budget to a surplus, the Greenspan Fed would lean dovish. The compromise worked, propelling growth and stocks higher and US Treasury debt yields lower.
Granted, Washington has fouled things up royally since then. One Wall Street crisis and one Donald Trump presidency later and the deficit is on the cusp of $1 trillion. Still, the Greenspan-Rubin deal could be a prototype for one Kuroda could strike with Finance Minister Taro Aso and Economy Minister Hiroshige Seko.
Kuroda should say: “If you gentlemen want more monetary support, you must do your part – and convincingly so.” Since 2012, Team Abe pledged to modernize labor markets, shift tax incentives toward smaller companies, empower women, slash red tape and encourage risk-taking. Kuroda can play the role of honest broker and prod Tokyo to regain reformist momentum.
This includes employing the bully pulpit to cajole the government into action. Abe’s failure to act after six years is hitting his approval ratings, now 43.3% in the latest Kyodo News poll. Abe has a clear reform blueprint for which there’s broad popular support. With a mild amount of public support, Kuroda could shame Abe into acting.
Kuroda’s gravitas could prod Japan Inc to give workers a raise. At their post-Abenomics peak, companies were sitting on $2 trillion of cash that could be spent raising wages and investment. But so far, Abe hasn’t found a way to get executives to open their wallets, kicking off a virtuous consumption cycle. Perhaps Kuroda can help if the BOJ and MOF work together.
What better way to make this sixth year a charm for Kurodanomics?