Think of him as the caveman with a heart of gold. No, not Fred Flintstone, the protagonist of one of history’s most-beloved animated sitcoms. We’re talking about Haruhiko Kuroda.
The Bank of Japan governor just returned from Jackson Hole, Wyo., where he roamed the Grand Tetons with his central bank peers. There, they strategized about how to influence a dynamic world with the most primitive of tools. They staggered back to their respective Bedrocks without a clue how to reignite the monetary fires that once raged so robustly.
Yet as well intentioned as he is, Kuroda is indeed finding a Flintstonian dilemma awaiting him in Tokyo. It’s become increasingly clear that one of his main tools for reviving Japan — the Nikkei 225 — has itself roamed into dinosaur territory. Since 2013, the BOJ has targeted the Nikkei with massive purchases of exchange-traded funds. Why hasn’t it revived corporate activity and, in turn, Japanese growth? “The Nikkei 225 is a Flintstones index from an abacus age,” argues CLSA equity strategist Nicholas Smith.
Had Kuroda targeted the much broader, and relevant, Topix index, he might have achieved more than merely feeding a handful of giants — like Fast Retailing and Softbank — at the top of Japan’s food chain (here, my Barron’s Asia colleague Shuli Ren delves deeper). And it’s but one example of why history’s most ambitious monetary experiment hasn’t evolved, adapted or unleashed the Darwinian forces the world’s No. 3 economy so desperately needs.
Kuroda’s bigger target — consumer prices — looked no less antediluvian at the Federal Reserve’s annual Jackson Hole retreat. There, yet again, he claimed the BOJ has more ammunition to fight deflation and won’t hesitate to act. Yet the biggest annual drop in core consumer prices in three years in July proves the BOJ is pursuing a Neanderthal strategy in a quantum-leap world. Its devolutionary decision in January to adopt negative interest rates, for example, is encouraging banks to lend even less.
What should the BOJ do to pull Japan into modern monetary times?
First, the BOJ’s massive easing moves these last 41 months prove that deflation is more about demographics and structural rigidities than the money supply. As this column has pointed out before, it’s high time the government reduced regulations, supported startups with tax incentives, loosened labor markets and imported foreign talent. BOJ largess can only augment a much-needed supply-side big bang.
Kuroda can help by expanding the basket of assets he’s buying. This includes more real-estate investment trusts as well as asset-backed, mortgage-backed and corporate securities to pump life into non-Nikkei sectors. A big effort also should be made to inject liquidity into local governments.
A key challenge for the BOJ is transmitting its historic yen-printing campaign beyond Tokyo, Osaka and Nagoya. These three metropolises — home to Nikkei members Hitachi, Itochu and Toyota — have benefited disproportionately from Kuroda’s yen devaluation. He should aim more cash at the Kyushu, Shikoku, Hokkaido and tsunami-ravaged Tohoku regions. Prime Minister Shinzo Abe could do just that by turning the 2020 Olympics into the Japanese games, not a Tokyo-centric vanity project. Locating events and new stadiums in the hinterlands would generate jobs, prosperity and post-Olympics tourism where it’s most needed.
Kuroda, meanwhile, could buy large blocks of local-government debt in, say, Japan’s 200 biggest cities. That would create more room to borrow and create new industries, support startups and generate jobs. The $780 billion worth of Japanese government bonds the BOJ buys annually is trapped in the Tokyo bank matrix. Bankers were plenty reluctant to lend the BOJ’s credit before January’s embrace of negative rates, worried about new waves of bad loans. Now, they’re hoarding JGBs with increasing urgency. Kuroda must focus locally if he’s going to get traction nationally — and globally.
The same goes for putting companies ahead of households. Targeting bonds and the Nikkei isn’t putting money into consumers’ hands. The BOJ can jumpstart the process by broadening stimulus efforts and targeting spending by average Japanese. Any such effort — be it BOJ-issued debit cards or giving companies cash to up wages — would be as unconventional as monetary policy gets. So would buying up distressed assets, properties and farms gone bad.
But the BOJ’s challenge isn’t all that unlike Fred Flintstone’s prehistoric footmobile — a car made of stone with no floor that he controls and powers with his feet. Unless the BOJ’s methods to gain traction evolve — or those of the rest of the Jackson Hole set — robust growth rates may be consigned to dinosaur status, too.
William Pesek is executive editor of Barron’s Asia. www.barronsasia.com
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