If anyone feels Janet Yellen’s pain these days, it’s Toshihiko Fukui, the Japanese central banker who 10 years ago also tried — and failed — to normalize monetary policy.
Funny how people debate whether the U.S. risks becoming Japan — it’s already there, at least in terms of monetary dynamics. Fed Chairwoman Yellen may not know it yet, but officials in Washington are retracing Fukui’s 2006 steps with eerie precision and reminding us that zero interest rates can have more in common with quicksand than economic stimulus.
In March 2006, the Bank of Japan concluded the world’s first QE experiment with great fanfare. The sound of popping champagne corks filled the Nihonbashi neighborhood surrounding BOJ headquarters. Four months later, Fukui’s team celebrated the first rate hike in over a decade. They even pulled off a second by February 2007, lifting benchmark rates to 0.50 percent. It’s a feat the Fed hopes to match.
But Yellen must ensure that the next part of Tokyo’s story, the one plaguing Haruhiko Kuroda today, isn’t repeated in Washington.
Fukui, like Japan’s recovery, quickly went to from hero to zero — a universal target of derision and scorn. Politicians, bankers and executives ganged up on the BOJ for taking away the punch bowl, in their reading, way too early. The first act by the governor who replaced Fukui in 2008 was slashing rates back to zero. And then Kuroda was tapped in 2013 by Prime Minister Shinzo Abe to take Japan into the monetary unknown, where the BOJ is still grappling for results.
Last Thursday, Kuroda left rates alone, effectively admitting he’s out of options to revive growth. But Kuroda also reminded us why the BOJ is many, many years — perhaps even a decade — away from trying another Fukui-like tightening cycle. The Fed might be, too, if Yellen isn’t careful.
The main lesson from Japan is that when you cut rates to zero and beyond, it’s best to have a clear exit strategy and stick to it. QE is meant to be a defensive move to support banking systems on the verge of insolvency and economies risking full-blown depression. It was never designed to be a multiyear, ever-expanding life-support system. It’s a monetary IV, pumping powerful medicine and nutrients into the patient until the immune system rallies and health returns. Instead, QE has lulled all economic sectors and players into a state of addiction and complacency.
This, I’d argue, is a bigger risk than asset bubbles. It explains why, 25 years after Japan’s asset bubble burst, politicians are still punting structural reforms forward. Unfortunately, Kuroda fell for Abe’s bluff, trusting that the prime minister would deliver on pledges to loosen labor markets, lower trade barriers, encourage entrepreneurship and deregulate industry. Abe wagered that the BOJ’s largess would be enough to revive the patient. He lost, and core consumer prices are falling along with investment, business confidence, private consumption and, of course, the Nikkei 225.
Media buzz about “zombie” companies ignores the fact Japan is the economic equivalent of the walking dead. Even when growth returns in the occasional quarter, it’s not organic output. It’s the artificial product of the lowest rates in the world, the most audacious asset-purchase program history has ever seen and the largest public debt anywhere. And the zombification of Japan isn’t over, as re-animator Kuroda insists he stands ready to ease again this year.
With the Upper House election in July, one can only hope Abe gets serious about the supply-side changes he’s been pledging for 41 months now. But the window for such upgrades is closing, and, sadly, the overwhelming focus is still on the BOJ.
One way Yellen can avoid this fate is pulling off rate hikes wherever possible. Congress will slam her. So will bankers, corporate executives and labor leaders. But the Fed must wean the system off free money as soon as possible — and the BOJ, too. In other words, Yellen and Kuroda have both recently presided over rate meetings. But the gathering that the heads of the BOJ, Fed, European Central Bank and Bank of England need to host is that of the 12-step variety.
Modern-day politicians are coasters by nature. Why delve into messy problems and risk angering voters when you can just lean on your monetary power? In the years after Lehman’s collapse in 2008, conventional wisdom held that America had nimbleness on its side. Regulators and bankers were quicker than Japan in admitting debt problems and repairing balance sheets. This view ignored how QE deadens the urgency for governments to fix underlying cracks and vulnerabilities. Eight years on, Congress is still blocking steps to invest in America’s future and raise potential growth rates. Why bother, when the Fed is on the case?
True, Yellen faces a seemingly impossible task of ratcheting up rates in an election year. Imagine the insults sure to be hurled at her from Donald Trump’s Twitter account. Also, she must be careful with markets on edge amid China’s slowdown, the U.K.’s temptation to leave Europe and deepening deflation. As Japan demonstrates, though, leaving rates at zero for too long is its own hazard, often doing as much to kill the animal spirits of which John Maynard Keynes spoke as stimulate them. Just ask Kuroda’s BOJ predecessors.
Based in Tokyo, William Pesek is executive editor of Barron’s Asia and writes on Asian economics. www.barronsasia.com