As the Bank of Japan struggles to avert a deflationary future, it’s being prodded to look back — 85 years to be exact.
Ben Bernanke’s ears must be burning with the media convulsing over what the former Federal Reserve chairman did and didn’t say in meetings last week with Bank of Japan Gov. Haruhiko Kuroda and Prime Minister Shinzo Abe. The gist of the reporting is that Bernanke, a student of the Great Depression, wants Tokyo to issue perpetual bonds. These would be of the non-marketable, zero-coupon variety that the BOJ could buy, freeing the Finance Ministry from ever having to repay. And, poof!, the government would have more room to stimulate growth without increasing a debt burden already risking downgrades.
The financial press is wrong to color such a move as new, fascinating and potentially unworkable. All you need to do is look back to 1931, when Korekiyo Takahashi was named finance minister and took the national balance down a similar road. Such unorthodox thinking earned Takahashi a reputation as Japan’s John Maynard Keynes. It also eventually got Tokyo’s greatest reflationist assassinated. Yet, not before he offered some vital pointers to Kuroda and Finance Minister Taro Aso on how to escalate — and perhaps win — Tokyo’s war on deflation.
Takahashi himself was a former BOJ leader. He was born in 1854 in Edo, later called Tokyo, and became the adopted son of a samurai. Takahashi learned English and even spent some time in Oakland, California. After returning to Japan in 1868, he finished his education and toiled as a low-ranking government bureaucrat before joining the BOJ in 1892. By 1911, Takahashi was governor. Two years later, Prime Minister Gonnohyoe Yamamoto tapped him to head the Finance Ministry, where Takahashi would later make a name for himself with bold and often anarchic moves.
In 1932, Takahashi himself became prime minister (for only seven months). Later, as the Great Depression spread, Tokyo returned Takahashi to the finance ministry, where he spearheaded dramatic expansions of fiscal and monetary policies. In a Wall Street Journal dispatch from the time, correspondent Burton Crane wrote that Takahashi demanded three things from policy makers: “inflation, inflation and inflation.” Ultimately, that meant monetizing debt — the BOJ buying up government IOUs and essentially burning them to beat deflation.
That gets us back to Bernanke’s burning ears. What I’ve long found fascinating about the Fed’s embrace of quantitative easing methods that the BOJ pioneered is the feedback effect from Washington. The first QE practitioner, Masaru Hayami (BOJ head from 1998 to 2003), was too timid in pushing the monetary envelope. Bernanke did far more after Lehman Brothers collapsed in 2008, turning the QE dial up to 11. By the time Kuroda arrived at BOJ headquarters in March 2013, he had reams of new experience and data from the West from which to draw as he turned the Tokyo dial to 12.
Three-plus years on, though, it’s clear Kuroda’s monetary assault was in vain. Deflationary pressures persist, wages have barely budged, corporate and household confidence is waning and traders roll theirs eyes when Kuroda insists he has the BOJ the tools to succeed. It might, if Abe acted to reduce structural impediments to growth, innovation and greater productivity. For Abe, this is a show-don’t-tell moment. He must stop talking about loosening labor markets, inspiring greater risk taking, more international management styles and championing women and do something.
Nevertheless, there’s more Kuroda could be doing — just as Bernanke reportedly said in Tokyo. The main speculation ahead of the BOJ’s July 28-29 meeting is going all-in with a shift toward “helicopter money.” In other words, by opening the monetary floodgate even wider and issuing the above-mentioned perpetual bonds. Now, some argue that Kuroda & Co. is already there. “Helicopter money has been pouring down in Japan,” analysts at Morgan Stanley argued in a July 14 note. They point out that data over “the last few months show an acceleration of BOJ purchases” above and beyond the official $750 billion per year pace.
Perpetual bonds are another story, though. As Jefferies strategist Sean Darby puts it, the central bank is reaching the logistical limits of purchasing Japanese government bonds. “At the end of this year, the BOJ will own around 40 percent of the outstanding JGBs. It is becoming difficult for insurance, banks and pension funds to physically sell further JGBs given their own solvency requirements. With the yield curve flat and with negative rates out to 10 years, the authorities have the chance to restructure their debt into ‘infinite’ or redeemable or perpetual bonds.”
Monetary purists abhor such suggestions. Admittedly, such explicit collusion between fiscal and monetary policies is a slippery slope. In a 2011 speech, then-BOJ Gov. Masaaki Shirakawa described the Takahashi era as a “bitter experience.” But the idea that this step runs into legal troubles is a bit of reach. Abe is willing to fudge the pacifist Constitution to send military troops abroad. Will the minutia of Japan’s public-finance laws really stop him? Also, Abe said he was “emboldened” by Takahashi’s bravery in the 1930s when he chose Kuroda to head the BOJ.
It’s not that simple, of course. Unless Abe does his part on the supply side to unshackle Japan Inc. from overregulation, encourage entrepreneurship and lower trade barriers, the BOJ will continue to come up short. Done together, bold structural reforms and aggressive stimulus could end Japan’s malaise for good.
Nor is this an easy call for Kuroda, who’ll be the fall guy if things went awry. In 2013, he vowed that the BOJ would “do whatever it can” to win the deflation war. Kuroda’s Mario Draghi moment is coming back to haunt him as he stands at a fork in the monetary road. He can take the route back toward orthodoxy, scale back the BOJ’s QE bonanza and admit defeat (Takahashi was assassinated in 1936 by rebellious soldiers for trying to dial back stimulus). Or he can go the other way — heed Bernanke’s warning that deflation may be with Japan for a long time to come and read from the 1930s playbook.
Thing is, Japan’s population is shrinking as its ratio of debt to gross domestic-product swells toward 250 percent and growth proceeds at a 0.9 percent pace this fiscal year. Abe, meanwhile, is working up yet another giant stimulus package. It requires an exercise in mass delusion to think Tokyo can ever repay its debt. If employing some of Takahashi’s 1930s ideas gives Japan space to restore growth and fiscal health, the ends may justify the means. Whatever it takes, right?
Based in Tokyo, William Pesek is executive editor of Barron’s Asia and writes on Asian economics, markets and politics. www.barronsasia.com
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