Your move, sir. That’s essentially what the Bank of Japan communicated to Prime Minister Shinzo Abe on Friday.
Look beyond the nitty gritty of allowing negative interest rates. Gov. Haruhiko Kuroda took another step toward expanding the BOJ’s anti-deflation campaign, but only the bare minimum. Enough to hit the yen and excite the Nikkei, but not sufficient to take the onus off Abe. For the 1,129 days of his premiership, Abe has talked incessantly about structural reforms he hasn’t gotten around to. In Tokyo political kabuki terms, Kuroda passed the baton to Abe, and it’s about time.
The past week was a decidedly bad one for Abenomics. First, exports plunged 8 percent in the most recent month. A weak yen, remember, was the one element of Abe’s revival scheme registering tangible results. Next, Abe’s reform point man, Akika Amari, resigned amid a messy graft scandal. And consumer prices fell again just days after Kuroda assured the Davos set inflation was quickening.
Kuroda’s step moves the narrative and marks a bit of an about-face. In recent months, Kuroda attempted to out Beijing China by claiming all’s grand in economyland. Never mind that household spending and industrial production are tanking along with exports — the BOJ’s monetary medicine is working, Kuroda’s team said. BOJ officials hinted their own top-secret inflation data series showed 2 percent inflation within reach.
Friday’s monetary surprise suggests Kuroda understands his ploy fooled no one. By embracing negative rates to boost bank lending, the BOJ is borrowing a page from the European Central Bank. It’s also ending the silly BOJ tapering debate filtering through markets (Japanese rates are headed even lower in the months ahead). What’s more, it ups the pressure on the government.
The departure of key Abenomics foot soldier Amari could be harbinger of trouble to come. Abe’s first stint as prime minister, a dreadful one from 2006 to 2007, ended amid a rash of Cabinet-member scandals. Amari is the fourth to go amid financial impropriety questions in this term, but by far the most consequential. It may catalyze opposition parties to block Abe’s agenda. If you think the reform process was too timid last year, just wait until Nobuteru Ishihara — a man with no known economic experience — takes over the economy portfolio.
Hence the importance of Kuroda’s gesture as China, Japan’s main trading partner, slows, stock markets plunge around the globe and the rising yen adds to the headwinds bearing down in Tokyo. Abe must make the most of the 12 months ahead to address the excessive regulations, rigid labor markets, a tax code that disincentivizes entrepreneurship and a marginalized female population that are impeding growth.
The same goes for changing corporate governance norms that enabled Takata’s CEO to keep his job for so long as the company’s air bags kill and maim drivers (media reports suggest he’s stepping down, finally!). Abe also must alter a mindset that allows Sharp to ignore a bid from Taiwan’s Foxconn in favor of a lower one from a government-backed fund.
Without major reforms, Japan will continue fighting the wrong war: deflation. Nobel laureate Milton Friedman wasn’t wrong when he called sustained drops in consumer prices a “scourge.” It’s detrimental to debt holders, corporate profits and tax revenues. But deflation isn’t Japan’s main problem; it’s a symptom of a lack of economic confidence. Politicians of Abe’s ilk tend to believe that once inflation returns, their job is done. As Kosuke Motani, author of “The Real Face of Deflation,” puts it, this linear focus is “just like a religion.”
A bad one, too. Aside from unnerving a gargantuan bond market featuring 10-year yields at an impossibly low 0.22 percent, inflation could slam households. As toxic as deflation can be, many Japanese view it as a stealth tax cut in an already highly-taxed nation run by a prime minister working to hike them further. Without pro-growth policies to create new jobs, raise productivity and buttress competitiveness, ginning up living costs could backfire spectacularly.
Kuroda is a smart, dedicated and cordial man, and he’s a good team player. Trouble is, Tokyo officialdom is overpopulated with yes-men reluctant to call Abe on his disingenuous argument big-bang reforms are afoot. On Friday, Kuroda signaled what Tokyo is doing isn’t enough. Your move, Abe-san.
William Pesek, executive editor of Barron’s Asia, writes on Asian economics, markets and politics. He is based in Tokyo. www.barronsasia.com
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