TOKYO – When economists and investors wonder what to expect from Japan’s next leader, they’re not thinking of the front runner in the premiership race that will be decided on Monday, Cabinet Secretary Yoshihide Suga. They are really thinking of Haruhiko Kuroda.
The Bank of Japan governor’s presence on the job explains why markets largely took news of Prime Minister Shinzo Abe’s departure in stride. That’s because “Abenomics” is really “Kurodanomics.” And odds are, it will still be after Monday’s Liberal Democratic Party election.
Suga, 71, spent the last eight years as Abe’s loyal chief cabinet secretary. He’s not known to have strong economic views and promises to continue Abe’s reform program. Since that has largely entailed hiring Kuroda to flood the globe with yen, markets are wondering what to expect next.
In interviews since Abe’s August 27 resignation announcement, Suga made it clear he will stick with Kuroda and his ultra-easy money policies. But as Japan’s 2020 grows darker by the day, the big question is whether Kuroda, with Suga’s blessing, will get more radical.
In recent months, Abe’s party tossed US$2.2 trillion of rescue stimulus at Japan’s pandemic-wracked economy, representing about 40% of gross domestic product (GDP). That adrenaline shot appears to have been largely ineffective as confidence wanes.
Tokyo’s 250% debt-to-GDP ratio leaves little scope for bigger fiscal injections. The onus is on the BOJ to do more.
That’s easier said than done considering it’s already hoarded half of all outstanding government bonds and big-footed stocks by gobbling up about 80% of exchange-traded funds (ETFs).
The most obvious option left is also the most tantalizing: revisiting the 1930s monetary adventures of Korekiyo Takahashi, the economist often called “The John Maynard Keynes of Japan.”
Economic boosterism, 1930s-style
Takahashi also could be called “Mr Modern Monetary Theory.” Back in the 1920s and 1930s, Takahashi wore many hats – finance minister, BOJ governor, even prime minister.
What he’s best known for to posterity is his hyper-aggressive mix of monetary easing and debt-fueled fiscal expansion with a regimen or two of straight-up debt monetization.
This last step, whereby a central bank buys large blocks of debt directly from the government, is as radical as it gets.
All the debate over so-called Modern Monetary Theory ignores that Takahashi effectively pioneered it. MMT holds that a country issuing debt in its own currency can borrow aggressively with little financial fallout or risk of default.
Purists worry MMT is a central banking version of Frankenstein’s monster. Once unleashed, how do you ensure it doesn’t come back to do you grave harm?
For his audacity, Takahashi has won a bunch of shoutouts over the decades. Former Federal Reserve Chairman Ben Bernanke, for example, claimed Takahashi “brilliantly rescued Japan from the Great Depression through reflationary policies.”
In June 2013, when Abe detailed his plan to eradicate deflation, he said the “example of my forerunner Takahashi has emboldened me.” That had “Takahashinomics” trending on Google and Twitter.
Takahashi, for better or worse, proved “there has been a psychological link between money finance” and consumer price levels in the public mind, argues Masazumi Wakatabe, author of Japan’s Great Stagnation and Abenomics.
Look no further than Kuroda, at times, channeling Peter Pan in explaining BOJ policies.
Takahashi’s policies ended up getting him killed. Around 1934, he figured it was time to trim runaway spending. His moves to cut the defense budget irked military officers so much that they assassinated him in 1936.
Fast forward 84 years and the odds of Takahashinomics making a comeback — whether partial or full —have never been greater.
Real problems, possible solutions
Kuroda is coming under intensifying pressure to stabilize growth and also combat a return of the deflation Abe pledged to eradicate back in 2012.
Consumer prices have been effectively flat this year as coronavirus lockdowns everywhere slam global growth. Any progress Kuroda’s team made to achieve the 2% inflation target has all but disappeared. So have Tokyo’s options to restore confidence as exports plunge and domestic demand wanes.
Worse, might deflation be returning, rendering much of the last eight years of Abenomics largely moot? In many ways, those currents never left. Though falling prices reflect fallout of the bad loan crisis of the 1990s, they’re also about terrible demographics.
As Abe’s predecessor warned back in 2012, a population aging as fast as Japan’s is more about savings than consumption, more about nostalgia than innovative startups. And so, deflation is a perfectly rational side effect to Japan’s structural rigidities.
As such, the BOJ “will maintain its policy stance to combat a coronavirus-induced recession in an economy that has long been hampered by an aging and shrinking population,” says analyst Shunsaku Sato of Moody’s Investors Service. “This means banks in Japan will have to continue to cope with ultra-low rates for the foreseeable future.”
Since 2013, Kuroda has been employing something approximating the “helicopter money” that Nobel laureate Milton Friedman wrote of in the late 1960s. And yet wages in Japan have barely budged, broadly speaking. Hence calls for something even more ambitious.
On a very basic level, markets are cheered that Kuroda, whose term runs into April 2023, is sticking around.
“Kuroda,” says Scott Seaman at Eurasia Group, “is likely very keen to stay on to continue to chase the elusive 2% inflation target and support economic recovery efforts, and to not be seen as setting a precedent of governors leaving when prime ministers who appointed them do.”
Japan continues to stump decades of Friedman disciples arguing that inflation and deflation are always unleashed by central bank policies. Not so much, it turns out.
All this is a warning to those piling into US Treasury inflation-protected securities, or TIPS. The normal rules Friedman and his ilk obey might not apply in these Covid-wracked times.
There are indeed reasonably conventional steps the BOJ can take to turbocharge reflation efforts.
It could buy up large blocks of corporate debt to lighten balance sheets so that companies can invest in future growth. The BOJ could seek an expanded mandate to set up a quid pro quo arrangement to prioritize debt purchases from companies pledging not to cut staff or salaries.
Kuroda’s team could hoard local government debt, creating fiscal space for municipal officials to add fresh fiscal stimulus. It could load up on foreign debt as a means of weakening the yen.
Time to get radical
Then there are the profoundly radical options that Kuroda has avoided thus far.
He could, for example, build a huge portfolio of distressed assets from around the nation: under-utilized airports; unloved stadiums and city halls; enrollment-starved universities; facilities built expressly for a 2020 Tokyo Olympics postponed by a year (if not cancelled for good), you name it.
Kuroda could even seek regulatory approval to issue BOJ-underwritten debit cards to put money directly into households. This would be a bow to Friedman. The idea being that it’s not enough to print untold trillions of dollars of yen — you have to ensure it’s channeled to the right places.
The most obvious target: households too worried about finances tomorrow to spend today. The BOJ could arm households with, say, 100,000 yen ($942) disbursements that won’t be replenished unless they’re spent. A temporary universal basic income scheme, if you will.
Another possibility: create a new support facility for regional banks. The more these roughly 100 institutions – spread out across prefectures far beyond Tokyo’s wealth and stable population – lend or invest, the more economic confidence might stabilize.
There’s always a chance, though, that these steps won’t be potent enough for the world’s fastest-aging major economy. Hence the temptation to dust off Tokyo’s 1930s playbook.
Dangers abound, of course, but little else modern Japan has tried has worked.
Until now, Kuroda has been tweaking and supersizing the experiments of Masaru Hayami, the BOJ leader who pioneered quantitative easing. Alas, he has done so with minimal success.
As a new government confronts a new strain of economic malaise, Takahashinomics may indeed get another shot at jolting Asia’s No. 2 economy back to life.