Masaaki Shirakawa is entitled to some serious schadenfreude.
In March 2013, Prime Minister Shinzo Abe effectively fired the Bank of Japan governor for insubordination. Shirakawa, a University of Chicago-trained economist, believed the BOJ alone couldn’t restore vibrant growth. Doing so, he argued, required bold structural changes to open an atrophied economy to greater competition. Abe wasn’t having it; he replaced the offending BOJ chief with Haruhiko Kuroda, a man ready to fire the monetary bazooka.
Three years on, things turned out just as Shirakawa foretold. The BOJ unleashed unprecedented stimulus, cornered the debt market and aggressively devalued the yen. And yet, deflation is deepening, wages are stagnant and the last Abenomics bulls are scrambling for cover. All you need to know about Abe’s “reforms” is that Japan just contracted for a fifth quarter out of the last 12.
Things may be about to get worse as chaos in markets filters into the “deflationary mindset” Gov. Haruhiko Kuroda was hired to change. The annualized 1.4 percent drop in fourth quarter gross domestic product preceded the Nikkei’s 16 percent stumble so far this year. Monday’s 1,069-point rally, remember, reflected hopes Kuroda will save the day. But can he?
Not in the long run, just as Shirakawa said all along. Deflation, Kuroda’s predecessor said, is a perfectly rational side effect of an aging population and rigid, high-cost labor system. But Kuroda can do more to pump life into Japan’s veins if done in conjunction with daring government action. That’s a huge “if,” given how timid Abe has been about structural change 1,147 days into his premiership. Abe continues to fob off his responsibilities on the central bank.
Here are four steps Kuroda can take to regain some momentum.
One: Have a serious heart-to-heart with Abe’s team. I’ve been following and interviewing Kuroda for years. He’s a smart man and a solid team player dating back to his days as a top Ministry of Finance official in the late 1990s and early 2000s. Soft-spoken, cordial and deferential in that Japanese salaryman way, he’s not the podium-thumping type. Yet Kuroda needs to read Abe and Finance Minister Taro Aso the riot act.
Only Kuroda has the gravitas to prod Tokyo to put a couple of big reform wins on the board ASAP. He should encourage Abe to shelve an insane plan to raise sales taxes next year (the economy still hasn’t shaken off 2014’s hike). And only Kuroda has the leverage to demand quid pro quos from this government. If you want me to halt the yen’s rally, Kuroda should say, you need to do X, Y and Z. Kuroda should do a big policy speech and shame corporate executives who refuse to share record profits from a weak yen with workers.
Two: Stop insulting our intelligence. Average Japanese I speak with — from businesspeople to neighbors to local shop clerks — are sick and tired of being told conditions are improving. Investors, meanwhile, are frustrated with Kuroda’s oft-stated contention that the BOJ has the tools to end deflation and stands ready to use them — a Japanese Mario Draghi. Well? Turns out, just as Shirakawa argued, Japan’s deflation problem isn’t as psychological as Abenomics thought. It’s institutional. That’s why the more yen Kuroda pumps into the economy, the less banks, businesses and households do with it.
In retrospect, this standoff between the creators of credit and users explains why Kuroda’s negative-interest-rate gambit backfired. It’s not enough to change the incentive structure for banks; what’s needed is genuine confidence in the future. Investors know this and read negative rates as a recipe for lower bank profits, not the start of a new lending boom. Markets need less talk from Kuroda & Co. about how grand things are, and more action.
Three: Think out of the box. I’ll spare you the Helicopter Kuroda jokes. After all, the strategy hardly worked for former Federal Reserve Chairman Ben Bernanke. But why not start buying up distressed assets around the nation to spread growth far beyond Tokyo and Osaka? The BOJ could overpay for white-elephant sports stadiums with no teams, museums with no consequential art on the walls, “international” airports with no overseas flights, unloved ski resorts and amusement parks and plots of unused municipal land and farms. Lots of radioactive properties up near Fukushima to grab up, too.
Here, Kuroda’s eight years as Asian Development Bank president may come in handy. The Manila-based lender’s role is to reduce poverty by broadening the benefits of GDP. As Kuroda explained to me back in 2005, getting the best results with limited tools and a fixed budget meant experimenting with unconventional projects and lending initiatives. Kuroda would do well to go back into his ADB toolkit and look for fresh ways to get economic traction.
Who knows, perhaps microcredit techniques could be employed (in bigger amounts, of course) in rural Japanese towns. The BOJ could load up on local-government debt, corporate bonds, asset-backed and mortgage-backed securities, exchange-traded funds and real estate investment trusts. It could begin issuing BOJ debit cards to households, putting cash directly in consumers’ hands. The big mistake the U.S. made post-Lehman Brothers was bailing out banks and insurance companies, not household balance sheets.
Four: Mull the unthinkable: The BOJ could just make it official and write off mountains of public and corporate debt. There’s no way, after all, a nation with a shrinking population and negligible growth can ever pay off more than $10 trillion of debt — not in the conventional sense. There’s some precedent here. In June 2013, Abe admitted he’d been “emboldened” by the exploits of Korekiyo Takahashi, a 1930s finance minister whose unorthodox policies earned him a reputation as Tokyo’s answer to John Maynard Keynes. Takahashi’s claim to fame was an undoctrinaire mix of policies that included monetizing debt.
Such thoughts send waves of panic through the minds of monetary purists — certainly those of the Chicago school like Shirakawa. Yet the more Abe and Kuroda speak of getting radical without actually doing it, the more credibility they lose. Abe must act immediately to loosen labor markets, open markets, encourage entrepreneurship, increase immigration and reduce government bureaucracy. Kuroda also has some moves up his sleeves — provided he can get Abe to roll his up as well.
William Pesek is executive editor of Barron’s Asia. www.barronsasia.com