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Federal Reserve head Jerome Powell will soon have company in the central banking hot seat: Japan’s Haruhiko Kuroda.
Powell has irked Donald Trump so much that the US president suggests the Fed chairman is a “bigger enemy” than China’s leader. It’s an unprecedented assault on the independence of the 106-year-old institution.
Powell’s apparent sin? Not cutting interest rates fast enough to ease the fallout from Trump’s trade war.
Bank of Japan Governor Kuroda won’t suffer the same rhetorical torture. Shinzo Abe, Japan’s prime minister, isn’t much of a tweeter. Nor does he attack rivals via social media. Yet Kuroda is surely dreading the next few weeks as lawmakers return to work.
Bad news all round
Last Friday brought news that inflation had stalled. Prices excluding fresh food rose only 0.6% in July, a two-year low. It’s the latest reminder that Tokyo is less than halfway to the 2% target it hoped to reach in 2014. Instead, price pressures are receding.
With China retaliating, expect Trump to throw new grenades at Asia’s biggest economy. Sure, he seemed to dial things back at last weekend’s Group of Seven summit in France, but the odds still favor Trump doubling down on his tariff arms race.
Japan’s exports were already down for an eighth straight month in July when Xi Jinping’s China announced taxes of between 5% and 10% on $75 billion of US goods. Trump is slapping 10% levies on $300 billion of mainland goods in December.
The G7 circus showed the biggest industrialized economies to be further apart on responses to trade discord than at any time in the last 50 years. As such, turmoil in markets is likely to get worse before getting better.
And not only with the US versus China, but also Japan versus South Korea. An escalating tit for tat between Abe and Korean President Moon Jae-in is hitting bilateral trade.
Japan’s exports to South Korea slipped 6.9% in July amid commercial blows. Imports from Korea fell 8.6%, a sign that Japan’s consumers may be just as skilled at retribution as the #BoycottJapan crowd – though quieter.
China’s slowdown, though, is Abe’s real problem. The weakest mainland growth in 27 years, courtesy of Trump, is ending the longest Japanese expansion since the 1980s. And it’s spoiling the economic legacy Abe assumed was a done deal.
Enter Kuroda, who’s had an eerily quiet 12 months. Since the US-China spat began, the BOJ stood pat. Starting with India in February, Asia-region central banks have engaged in a race to bottom. Australia, Hong Kong, Indonesia, Malaysia, New Zealand, the Philippines, South Korea and Thailand all cut official rates.
China has added waves of fresh liquidity.
Kuroda’s BOJ has held its fire, much to the government’s chagrin. One reason: Since April 2013, his team has done more than any central authority in history. It hoarded half of all outstanding government bonds and nearly 80% of exchange-traded funds. The BOJ’s balance sheet now exceeds the nation’s $4.9 trillion of annual output. That’s unprecedented for a major central bank.
But it hasn’t taken Tokyo very far. Paychecks have barely increased since 2013. In fact, real wages are down for six straight months now – just as trade war tensions deepen. As economists fret about Japan sliding into recession, Abe’s Liberal Democratic Party is approaching freak-out mode.
The immediate worry is a dearth of policy options. The first step should be postponing a sales tax increase planned for October. A 2014 boost from 5% to 8% ended in a mild recession. Another bump to 10% could do the same at the very worst moment.
The LDP could cobble together another supplemental budget. Yet it’s not as if the last 10 fiscal jolts kicked off a virtuous cycle of self-sustaining growth, renewed innovation and increased productivity. Japan’s debt burden is now the biggest as a ratio to gross domestic product among major economies. Abe has limited latitude to ramp up public-works spending.
Without the bold structural reforms Abe promised nearly seven years ago, Japan will remain highly vulnerable to trade war fallout. One major failure: not weaning G7 member Japan off a developing-nation like addiction to exports.
Ironically, progress over the weekend on a bilateral trade deal with the US could complicate the BOJ’s job. After all, lower agricultural prices will increase disinflationary forces in Japan.
Of course, there could be an upside for Japan if Trump successfully strong-arms China into abiding by global commercial norms. That would be a major plus for Japanese companies, which have long received short shrift in the mainland market.
For now, though, Kuroda is grappling with a fast-darkening economic outlook. The yen’s 3.5% rally this year is denting business confidence, making it even less likely Japan Inc will boost wages in 2020.
What’s the BOJ to do? Policymakers could diversify their purchases, gorging on asset-backed and mortgage-backed securities. They could buy local-government debt and even corporate bonds. The latter support could be conditional on CEOs increasing wages. The BOJ needs to do something, though, lest it looks asleep on the job. Even modest steps could cap the yen, supporting exports.
No truce in Abe v Moon
Abe, too. His Trumpian slaps at Moon’s Korea couldn’t come at a worse moment for Asia. Recent moves to limit the export of sensitive materials needed by Korean tech firms and scrub Seoul from Tokyo’s preferred trade list raises the stakes. Moon is pushing back, withdrawing from a key intelligence-sharing pact.
There’s plenty of blame to go around. Both Tokyo and Seoul have long engaged in geopolitical jousting for domestic political gain. But context matters. This latest brinksmanship comes amid a fast darkening economic backdrop.
Joonwon Yoon of HDC Asset Management speaks for many when he calls recent actions a “signal that the Korea-Japan conflict will continue.” Bottom line, Yoon says, “it adds more uncertainties” to a uniquely turbulent global economy.
It’s complicated, though. So far, Abe’s government has been more accommodating than expected in okaying export orders for Korean companies. Moon, meantime, used his August 15 address marking the 74th anniversary of Korea’s liberation from Japanese colonial rule to “extend something of an olive branch to Japan,” argues economist Kelsey Broderick of Eurasia Group.
Moon’s statement that “if Japan chooses the path of dialogue and cooperation, we will gladly join hands” is indeed reason for hope. Sure, this was before he scraped the intelligence sharing agreement last week. But it’s code for “call me, Abe-san. Let’s talk.”
Will Abe? Abe should indeed pick up the phone and call Moon, before Tokyo versus Seoul reaches the same point of no return as Washington versus Beijing.
“The urgency of this situation, together with the likelihood that third-party mediation will not be able to deliver results quickly enough, necessitate that Tokyo and Seoul not sit back and wait for outside powers to save the day,” says Katrin Fraser Katz from the Center for Strategic and International Studies. Upping that urgency, she says, is the fact “the United States, in particular, has been slow to provide arbitration assistance in this round.”
It’s high time Abe and Moon realized they have more to gain from working together toward a more vibrant future, not trading barbs over the past. But don’t hold your breath for any change soon.
In the meantime, central bankers from Powell to Kuroda are in the hot seat. And the heat will only intensify.