“And (Bank of Japan Governor) Mr. Kuroda can’t keep up the act forever. If he revs the printing presses too high, the costs could be ruinous in the form of an asset bubble or currency collapse.” Aaron Back, New York Times
BOJ Can Still Shock, but Can’t Save Japan Alone
Bank of Japan Governor Haruhiko Kuroda smiles during a news conference at the BOJ headquarters in Tokyo on Friday. Reuters
By Aaron Back
Are you impressed yet? The Bank of Japan surprised investors with a Halloween treat on Friday, expanding its already huge monetary stimulus. Nonetheless, it needs help from the rest of the government to get Japan’s recovery back on track.
Many economists had predicted additional easing, but the consensus among forecasters was that it wouldn’t come until perhaps April next year.
Faltering inflation forced the BOJ’s hand. Its official target of 2% inflation was looking increasingly out of reach, as the core CPI, stripping out the tax increase, rose just 1% from a year earlier in September, slowing substantially from a high of 1.5% in April.
Still, acting this early is bold, the kind of shock-and-awe tactic that is typical of BOJ Gov. Haruhiko Kuroda. He seems to appreciate the psychological aspect of monetary policy, and in particular the difficulty of shaking the Japanese populace out of habits formed by decades of falling prices.
This was made clear enough in the BOJ’s statement Friday, which said that declining consumption after April’s sales-tax increase, and the recent decline in oil prices, though both likely temporary, put at risk the “conversion of the deflationary mind-set.”
Adding to the psychological impact is that the BOJ’s statement, terse at just a page and a half, is arresting in its simplicity. The bank will grow the monetary base by ¥80 trillion ($732.48 billion) a year, up from ¥60 trillion to ¥70 trillion under the existing program. This will mostly come from additional purchases of Japanese government bonds. But to the delight of investors, the BOJ will also triple its purchases of exchange-traded equity funds and real-estate investment trusts.
And yet, fiscal policy still is working at cross-purposes, with the consumption tax slated to go up again next October. If anything, the BOJ’s move makes it more likely that Prime Minister Shinzo Abe will give the green light when he must authorize the increase in December.
His government sees this as vital to shore up Japan’s fiscal position. But as already seen this year, it also can throw the entire reflationary project off course.
And Mr. Kuroda can’t keep up the act forever. If he revs the printing presses too high, the costs could be ruinous in the form of an asset bubble or currency collapse.
That leaves structural reform as the last way to prop up growth.
Mr. Abe has taken many positive steps, including deregulation of the electricity market and a sincere push for more women in the workforce. But he still is tiptoeing around the most sensitive areas, like boosting labor market flexibility and subjecting farmers to foreign competition.
With the BOJ going all in, the prime minister will have no one to blame but himself if “Abenomics” falls short.