With his nation’s economy contracting under disaster damage of as much as ¥25 trillion ($310 billion), Bank of Japan Gov. Masaaki Shirakawa is signaling that his biggest worry is inflation.
At stake for the student of Milton Friedman is protecting the bank’s independence from financing public spending, as urged by lawmakers after the record March 11 earthquake. Shirakawa, 61, instead oversaw a ¥40 trillion boost in short-term funds, eschewing the scale of longer-dated asset purchases the Federal Reserve mounted after confidence in credit markets collapsed and the U.S. entered its worst recession since the Great Depression.
His strategy, which won the plaudits of 17 of the 24 primary dealers in Japan’s government bond market in a Bloomberg News survey, may not be enough as he warns of the danger of asset bubbles. The yen’s climb to about 6 percent from a postwar high against the dollar risks undermining exporters’ earnings.
“The vital signs show that the Bank of Japan isn’t doing enough now, even though they definitely recognize monetary policy is important,” said Koichi Hamada, who taught Shirakawa at Tokyo University and is now an economics professor at Yale University in New Haven, Connecticut. “What he does is a very, very small amount.”
Shirakawa, in office since April 2008, is Japan’s longest- serving economic policymaker. He has seen four prime ministers from two parties and, just since the Democratic Party of Japan defeated the Liberal Democratic Party in August 2009, three finance ministers and four economic and fiscal policy chiefs. He declined to comment through a spokesman for this article.
Mini-QE2 rapped as ‘shoboi’
He pushed a ¥5 trillion expansion in the BOJ’s asset-purchase fund that was set up last year to help bring an end to the deflation that became embedded in Japan’s economy in the late 1990s. The increase was about one-tenth the size of the Fed’s so-called QE2, or second episode of quantitative easing.
“There is a higher risk of leaving the economic condition as poor as it is now than the risk from the BOJ’s direct purchases of bonds,” said Yoichi Kaneko, secretaly general of the DPJ’s backbench Anti-Deflation Group and a former economist at the Paris-based Organization for Economic Cooperation and Development. “He’s like a staff officer who’s become a general.”
The BOJ chief, a compromise candidate after a former administration failed to get its top two picks for governor approved by lawmakers in 2008, bristles at any unfavorable comparison with Fed policy. After a reporter characterized the Japanese monetary stimulus as “shoboi,” or a lame or shabby effort, Shirakawa chided him:
“You used the word ‘shoboi,’ but I want to strongly say that none of the Policy Board members, including me, think it’s shoboi,” Shirakawa said March 14 in Tokyo. He explained that BOJ purchases include riskier assets such as exchange-traded funds that mean its plan is more ambitious than adding government debt.
Shirakawa also says the BOJ’s balance sheet, at ¥134.6 trillion, is larger than the Fed’s as a share of the economy. Even so, its assets, which include securities used for open-market operations and those accumulated through liquidity injections and stimulus programs, have shrunk 10 percent from the peak after the March 11 temblor, tsunami and nuclear crisis.
The BOJ’s easing before and after the quake hasn’t stopped the yen from appreciating. The yen broke through 80 per dollar this month for the first time since speculation that Japanese investors would repatriate funds drove it to a record 76.25 on March 17.
Debt monetization foe
“The point is how quickly a central bank enlarges its balance sheet,” said Masayuki Kichikawa, chief Japan economist at Bank of America Merrill Lynch in Tokyo. “The BOJ’s behavior over the next few months will determine the reputation of Governor Shirakawa in his remaining tenure,” he said, adding: “I’m afraid the BOJ may be coming back to the wait-and-see stance it had before the quake.” Shirakawa’s tenure ends in 2013.
At its most recent meeting April 28, Shirakawa and seven other board members rejected a proposal by Deputy Gov. Kiyohiko Nishimura to boost the central bank’s asset purchases by another ¥5 trillion. At the same time, Shirakawa said he’s prepared to take “appropriate” action if needed.
Shirakawa, who took Nobel laureate Friedman’s last course at the University of Chicago, has also sought to shoot down any effort by lawmakers to request that the central bank directly finance government spending. He has publicly warned against the step at least seven times since the disasters struck.
“If a central bank starts to underwrite government bonds, there may be no problems at first, but it would lead to a limitless expansion of currency issuance, spur sharp inflation and yield a big blow to people’s lives and economic activities,” as has happened in the past, Shirakawa said in an April 7 press conference.
The BOJ chief has consistently warned against keeping interest rates too low for too long and planting the seeds for asset bubbles. He reiterated the point in a May 5 speech in Helsinki, saying that the 1980s bubble was brought on in part by “monetary accommodation.”
Respect purely ‘academic’
Inflation in Japan, though, hasn’t reached the BOJ’s definition of price stability—sustained 1 percent gains in the consumer price index excluding fresh food—since the early 1990s. There’s also been scant sign of asset bubbles: the Nikkei 225 Stock Average is 75 percent lower than its record reached in 1989 and land prices have fallen in 18 of the past 20 years.
Shuhei Abe, chief executive officer of Sparx Group Co., Asia’s second-largest hedge fund, said the BOJ initially responded well to this year’s crisis by flooding the market with liquidity. At the same time, Abe said, Shirakawa’s focus on fighting inflation may be too dogmatic.
“Shirakawa has religiously maintained that his main responsibility is to fight inflation, which is his academic position. I respect him as an academic, but not as a central banker,” Abe said in an interview last month.
The governor gots mixed results in a survey of Bloomberg users this month. While 50 percent of respondents said the BOJ’s stance is appropriate, Shirakawa was behind Fed Chairman Ben S. Bernanke, European Central Bank Chairman Jean-Claude Trichet and Bank of England Gov. Mervyn King in a ranking of who did the best job managing their own crises. He got 9 percent of votes, versus 42 percent for Bernanke. Shirakawa’s favorability rating rose to 44 p ercent from 31 percent in October 2009.
Power supply headache
In the latest sign Japan’s economy will struggle to rebound after the disaster, Goldman Sachs Group Inc. economists Chiwoong Lee and Naohiko Baba on May 10 cut their projections for gross domestic product, seeing a 0.2 percent contraction for the 2011 calendar year compared with a previous estimate of 0.7 percent growth. Goldman cited supply-chain disruptions hurting the outlook for exports.
Factory output dropped a record 15.3 percent in March from February and household spending slid 8.5 percent from a year earlier, government reports showed April 28. Retail sales fell the most in 13 years, according to data released the day before.
Prime Minister Naoto Kan’s pressure this month on Chubu Electric Power Co. to suspend a nuclear plant south of Tokyo over safety concerns added to supply-disruption concerns. The Tokyo region is already facing a shortage of electricity going into the peak-demand summer period after Tokyo Electric Power Co.’s Fukushima plant disaster.
“The issue of power supply is giving us a headache on top of the supply-chain issue,” Toshizo Tanaka, an executive vice president at Canon Inc., the world’s largest maker of cameras, told reporters in Tokyo April 26. The company forecast an 11 percent drop in 2011 net income, abandoning its previous forecast for a 26 percent increase.
While Shirakawa described the economic outlook as “severe” at the Diet on April 30, he has repeatedly said the nation’s challenge is one of restoring supply, rather than boosting demand.
“He recognizes the limits of monetary policy,” said Jacob Frenkel, chairman of JPMorgan Chase International, who led Israel’s central bank from 1991 to 2000 and taught Shirakawa at the University of Chicago. “He performed very well in terms of rising to the challenge of the short-term changes while keeping an eye on the medium-term strategies.”
Smooth approach linked to career
Shirakawa was schooled in economics at Tokyo University and joined the Bank of Japan in 1972, later taking time to get a master’s at Chicago in 1977. A fan of bird watching, he declined in his first press conference in 2008 to identify himself as either a “hawk” or “dove” on monetary policy, saying any response would be an insult to birds.
His focus on the smooth operation of payments and settlements after the quake may reflect lessons from his career. He was director of the financial and payment system office in 1990 as Japan’s bad-loan crisis began. Later posts included general manager for the Americas, which involves communicating with the Fed and reporting on the U.S. economy.
Shirakawa had been appointed as a deputy governor by a former Liberal Democratic Party administration, before being tapped to head the BOJ after the DPJ opposed the first two candidates for being too close to the government.
The DPJ may now privately have some buyer’s remorse, according to Takehiro Sato, chief economist at Morgan Stanley MUFG Securities Co. Toshiro Muto, a former vice finance minister who was the LDP’s first pick, might have embraced larger monetary stimulus, Sato said.
“I believe he would have taken bigger steps to try to overcome deflation,” said Sato, who credits Shirakawa with acting quickly after the quake while faulting him for not doing enough before.
Shirakawa has defended the BOJ’s actions before the quake, saying last year’s unveiling of an asset purchase program encompassing ETFs, Real Estate Investment Trusts and corporate bonds meant it was taking high risk onto its balance sheet.
The BOJ also helped avoid a deep deflationary spiral in the late 1990s, according to Shirakawa. A bad-loan crisis in 1997-98 saw financial companies from Yamaichi Securities Co. to Hokkaido Takushoku Bank Ltd. collapse.
Even so, the central bank then failed to cut interest rates quickly enough or adopt quantitative easing fast enough to spark the economic rebound that would have ended deflation, some analysts said.
“The deflation we’re in today is the result of the repeated failures of the BOJ,” said Naoki Iizuka, a senior economist at Mizuho Securities Inc., a brokerage unit of Japan’s third-largest bank. “How history will judge Shirakawa will depend on what he does” as the BOJ’s counterparts raise rates, he said.
Sustained near-zero rates in Japan as the Fed and European central banks withdraw stimulus would “help the yen depreciate, boosting exports and facilitating a manufacturing-led expansion,” Iizuka said.
“That’s what I’m hoping for.”
With assistance from Ken McCallum in Tokyo and Timothy R. Homan in Washington.
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