As economists hit the books on the dire days of the 1930s, it only seems fitting that the Bank of Japan might be dusting off Korekiyo Takahashi’s playbook from that depression-ravaged period.
Takahashi is often called “the John Maynard Keynes of Japan” for his aggressive reflation efforts nine decades back. He’s a highly complicated figure in Japanese history, serving as BOJ governor, finance minister and even prime minister before his spectacular 1936 death by assassination.
The policies Takahashi championed have returned to the conversation thanks to Prime Minister Shinzo Abe’s reflation push. In June 2013, Abe said the “example of my forerunner Takahashi has emboldened me,” causing the name to trend on Google and Twitter.
Now, Takahashi’s views appear to be trending at BOJ headquarters as never before, too.
Too little too late?
On Monday, the BOJ removed the cap on government bond purchases. By essentially pledging unlimited bond-buying, BOJ Governor Haruhiko Kuroda’s team follows the Federal Reserve’s plans to hoard debt “in the amounts needed” to stabilize growth amid coronavirus fallout.
This moves Tokyo beyond anywhere it’s taken policy in generations. The big question is: can the BOJ put a floor under Japanese growth or is it too little too late?
Though the odds favor the latter, the former can’t be ruled out.
At issue is whether Kuroda and company can indeed dispense with the caution that has plagued quantitative easing efforts since 2013.
In April that year, Kuroda took QE into uncharted territory. The centerpiece of the BOJ’s first “bazooka” shot was a pledge to buy as much as 70 trillion yen, or US$652 billion, of government debt annually.
Then came the escalations – most famously in October 2014, when the BOJ shifted the yen printing presses into their highest setting: 80 trillion yen, or $745 billion, annually.
In 2016, Team Kuroda introduced negative yields. It upped purchases of corporate bonds and greatly ramped up support for stocks via exchange-traded funds.
Yet inflation hasn’t been close to the 2% target and real wages didn’t surge to kick off the virtuous consumption cycle that Abe had hired Kuroda to engineer.
Conservatism and timidity
The main reason is Abe’s glacial reform efforts. The BOJ has been experimenting with QE since the early 2000s. What’s needed is a supply-side big bang that increases efficiency, boosts innovation and catalyzes a startup boom. Rather than do the heavy lifting to deregulate a rigid and aging economy, Abe bet it all on Kuroda’s monetary bazooka.
But BOJ timidity deserves blame, too. This dynamic is worth exploring now as Kuroda hints at going the Takahashi route to leave no monetary level untouched.
There’s always a risk that the BOJ’s new aggressiveness might be more rhetorical than substantive. As Reuters and other outlets report, this may be a symbolic effort to appear to keep up with other major monetary powers. In recent years, for example, the BOJ’s government bond purchases sometimes amounted to less than 20 trillion yen ($186 billion) annually, well below target.
That’s because the BOJ’s already dominant role in the market enables it to control yields quite easily. Stable yields, though, are not the same as pumping more physical liquidity into credit markets that fuel new lending. The same goes for easing corporate funding strains. Addressing credit crunches is vital, but so is steady and generous monetary support.
As part of Monday’s unlimited purchase plan, BOJ officials plan to up corporate-asset purchases. As of March, the BOJ held about $29 billion of corporate debt and $21 billion of commercial paper. On Monday, it pledged to boost purchases of both to a combined 20 trillion yen ($186 billion) from about 7 trillion yen ($65 billion).
Still, this seems a far cry from “whatever it takes.” Corporate borrowing costs, for example, have edged higher despite the BOJ’s pledge last month to buy more risky assets.
Just not too risky, though. Both the Fed and ECB are turbocharging asset purchases by pivoting to junk bonds. While moral hazard risks abound, the key issue is keeping secondary debt markets from seizing up the way they did in 2008.
Given this, the BOJ would be wise to get out of its own way and take bigger risks. Kuroda’s squad should be gorging on sub-investment-grade debt. That would augment government efforts to avoid mass layoffs via fiscal stimulus.
It’s not clear, though, that the BOJ is ready to get truly radical. Under Kuroda, the BOJ has tested the boundaries of monetary science – but carefully, acting conventionally in the face of wildly unconventional conditions. Case in point: demographic trends that are, themselves, deflationary.
Lots more to do
Kuroda’s predecessor, Masaaki Shirakawa, long warned that Japan’s fast-aging population stood in the way of reflating the economy. Retirees, Shirakawa reasoned, buy fewer homes, cars and electronics than 20-somethings.
All the more reason, he argued, to rekindle Japan’s animal spirit with reforms that kick off a wave of innovation and confidence.
Central bank cash tends to get little traction in modern-day Japan. Hence the need for Abe’s team to use fiscal levers, including lower corporate taxes. Abe should immediately suspend the last two sales tax increases, slicing the rate to 5% from the current 10%. A horribly-timed October hike, after all, contributed to the 7.1% plunge in fourth-quarter growth.
The BOJ can help by thinking outside the proverbial box. Sure, Kuroda’s team could buy more government bonds. Even though its vast holdings – about 50% of outstanding issues – have deadened trading activity, the BOJ could always add more. It could boost ETF purchases.
Though the BOJ is already among the 10 biggest shareholders in nearly 40% of listed Japanese companies, it could still boost stakes.
Let’s get radical
Better results might come by diversifying asset buying. And this gets us back to Takahashi and the 1930s. Takahashi, it can be argued, pioneered QE several decades before BOJ Governor Masaru Hayami did in 2001. He did it by effectively nationalizing public IOUs, or what economists derisively call monetizing debt.
The BOJ’s policies today are quite different. In the 1930s, policymakers bankrolled government borrowing on the front end and effectively removed those bonds from circulation. Kuroda’s policy is largely about overpaying bonds to add liquidity to the economy.
It’s not clear the BOJ will actually go this route. And the yen’s relative lack of reaction suggests markets will need convincing.
Kuroda has dismissed suggestions that the BOJ grab substantially bigger blocks of debt that it rolls over indefinitely – Modern Monetary Theory, or MMT. “When a central bank monetizes debt unlimitedly, it will most certainly trigger hyper-inflation and cause huge damage to the economy,” Kuroda said in May 2019.
Yet the BOJ should be ramping up purchases of asset-backed and mortgage-backed debt. It should load up on local government debt to pump more cash into rural communities slammed by Covid-19, which has cost Japan 80% of its tourism trade. Clearing up municipal balance sheets would free up cash to revitalize rural economies.
The BOJ and lawmakers also might consider a quid pro quo with Japan Inc chieftains. Why not devise a scheme to buy large blocks of debt from companies willing to boost wages? A similar incentive structure could prod CEOs to deploy the roughly $4 trillion of cash on corporate balance sheets at the end of 2019.
Kuroda’s team could roll out special lending facilities for Japan’s roughly 100 regional banks. The profitability of these institutions was hit hard by the BOJ’s negative-yield policy, which makes it hard to borrow cheaply and lend at higher rates. Rural banks could use that capital to up lending and serve as Covid-19 shock-absorbers.
There are other get-radical things Kuroda could consider. The BOJ could create a distressed-asset mechanism to take white-elephant sports stadiums, conference facilities, failing international airports, golf courses, failing real-estate projects, you name it, onto its balance sheet.
The BOJ could load up on foreign bonds as a ploy to weaken the yen. It might consider injecting cash directly into households.
This, after all, is what Abe’s $1 trillion coronavirus rescue plan aims to do. If households knew additional tranches of handouts via a new BOJ program were coming, Tokyo might have more success breaking the “deflationary mindset.”
And, of course, Kuroda – and Abe – could always go the full Takahashi, reading from the 1930s playbook to save a savaged financial system. Reflating the world’s third-biggest economy is eminently doable.
After all, Japan did it before.