Once again, Haruhiko Kuroda has a bad case of Mario Draghi on the brain. The last time the Bank of Japan governor channeled his beleaguered European Central Bank peer was in April 2013, just as Kuroda took the monetary reins in Tokyo.
Kuroda’s pledge to do “whatever it takes” to end deflation echoed Draghi’s own oft-stated catchphrase. In the six-plus years since, few can argue Kuroda hasn’t done a ton to reflate Japan. Even so, the longest expansion since the 1980s is being undone by the global trade war.
That has Kuroda invoking the ECB president’s name. In Fukuoka, Japan, recently, where the Group of 20 finance officials met, Kuroda said: “Like Mario Draghi, I think we can do these things if necessary.” In recent speeches and interviews, though, Kuroda has made clear that “if” is really “when.”
Central bankers never speak of monetary easing lightly. They tend to avoid specifics at all costs. In a chat with Bloomberg, for example, Kuroda telegraphed the BOJ’s capacity to do something big policy-wise.
Among the possibilities when BOJ officials meet on Wednesday and Thursday: pushing the benchmark -0.1% rate further into negative territory; engineering even lower 10-year yields; boosting the monetary base; or supporting asset prices.
It’s clear that as Japan loses momentum, Kuroda is under increasing pressure to act. Yet none of the four options Kuroda is previewing will make a dent in Tokyo’s fast-growing list of challenges.
That said – why not do all four anyway?
For an economy that is arguably more addicted to free money than any other, any additional BOJ largess might help: just the psychological jolt could reap dividends. More important, though, is trying something new. Here are three suggestions.
1: Stop this inflation-target folly
Punters were excited in 2013 when Tokyo established a 2% goal for the consumer price index. Even now, after epic easing, inflation is barely halfway to that level. Despite hoarding half of all outstanding Japanese government bonds and upwards of 80% of exchange-traded funds, the “deflationary mindset” Kuroda sought to change persists.
The problem is that deflation is a symptom of Japan’s two-decade malaise, not a cause. It’s a lack of confidence in future growth that drove prices negative, not the supply of yen. The answer is to target something else – like wages.
In March, real wages fell the most in nearly four years. The 2.5% drop was not an aberration. Even as Japan enjoyed its second-longest postwar expansion – before Donald Trump’s trade war, that is – companies were painfully stingy with pay. Despite fast-shrinking labor markets, Japan Inc. lacks the confidence to share record profits with workers.
That starved Japan of the virtuous cycle Prime Minister Shinzo Abe promised. In 2018, for example, average wages adjusted for inflation rose just 0.2%. To get greater traction, Tokyo should shift the goal from 2% inflation to 2% real wages. Or, perhaps target the size of Japan’s gross domestic product, which shrank to US$4.9 trillion in 2018 from US$5.2 trillion in 2013 when Kuroda grabbed the reins.
2: Use that BOJ bully pulpit
In consensus and deference-obsessed Japan, Kuroda has been a reticent presence in economic circles. It’s time he tried a new tack and publicly urged Abe’s team to do its job. The deregulatory big bang Abe promised hasn’t materialized. Some tweaks to corporate governance enriched shareholders, but failed to trickle down.
Only Kuroda has the gravitas to prod bolder and faster action. In speeches and interviews, Kuroda should be talking up the need for looser labor markets, less red tape for startups and tax incentives to augment the BOJ’s policies.
Talking point No. 1 should be encouraging lawmakers to scrap a sales tax hike planned for October. The last such move in 2014 – from 5% to 8% – tipped Asia’s second-biggest economy into recession. The planned hike to 10% later this year is a risk Tokyo can’t afford as US President Trump’s trade war intensifies.
Talking point No. 2: Let’s regain the reformist momentum. The reason Trump’s tariffs knocked Japan off balance is the lack of moves to raise competitiveness. Kuroda could set up a quid-pro-quo dynamic. Why not offer to match any significant supply-side steps to enliven demand and business creation with monetary support? You cut red tape here, I add liquidity there.
3: Think out of the box
Today’s debate about “Modern Monetary Theory” ignores that Japan has effectively been toying with the strategy for 20 years. MMT holds that a nation borrowing in its own currency can spend with abandon with little risk of default. The BOJ disputes that, of course.
“Japan has deployed economic stimulus policies,” Kuroda said earlier this month. “But the government believes it’s important to restore fiscal health and make fiscal policy sustainable. It’s wrong to say Japan is resorting to MMT.”
Fair enough, though a central bank whose balance sheet is bigger than the entire economy has stumbled into MMT territory whether it admits it or not.
The BOJ could veer much further into uncharted policy experiments. Possibilities include: buying huge blocks of bank debt to lighten balance sheets; loading up local government debt; creating aggressive new lending facilities; buying up distressed assets from mothballed stadiums to under-utilized airports and municipal offices; devising ways to put cash into the hands of households around the nation.
If Kuroda is going to go the full Draghi “whatever it takes” route, the BOJ shouldn’t hold back; after all, many investors will say Draghi has pulled as many monetary punches as he’s landed.
As Japan slows, though, there’s much both Abe and Kuroda could be doing to raise the nation’s game. It’s time Tokyo shifted its reform drive into a higher gear.