Commentary / Japan

Bank of Japan confronts the Wall of Shame

by William Pesek

Barron's Asia

Readers of this column know I lack confidence in Shinzo Abe’s ability to revive Japan. With majorities in both houses of the Diet, a popular reform plan and high approval numbers, the prime minister should’ve been able to exact a few major upgrades in 1,405 days. Instead, we’ve mostly gotten spin.

Case in point: his much-ballyhooed determination to empower women. That’d be news to the World Economic Forum, which just downgraded Abe’s “womenomics” ruse by 10 places from 2015. It ranks 111th, behind Nepal and Ethiopia. His other “successes” include largely voluntary corporate governance tweaks, modest steps to rein in the farm lobby and lower trade barriers.

The failure by a succession of governments to change the system explains why the Bank of Japan is failing to reflate the economy. Abenomics is said to have three “arrows” — monetary easing, fiscal expansion and deregulation. Really, it has two elements: yen depreciation and big talk. With BOJ Gov. Haruhiko Kuroda widely expected to stand pat today, the role of government spin is sure to increase.

Kuroda has proved that monetary policy alone can’t end deflation. Yet he’s also shined a spotlight on decades of errors that put the No. 3 economy in this situation — and the policymakers who shackled Japan with the perma-malaise Kuroda has tried, and failed, to end. Here’s a list of personalities who deserve a place on Japan’s Wall of Shame:

Satoshi Sumita: The BOJ governor from 1984 to 1989 was patient zero when it comes to authorities enabling change-adverse politicians. While his successor, Yasushi Mieno, gets lots of blame for hiking interest rates too much in 1989 and 1990, Sumita’s easy-money tenure created the gargantuan asset bubbles Mieno struggled to curb. Twenty-seven years after Sumita left the building, the BOJ is still grappling with fallout from his supersized printing presses.

Ryutaro Hashimoto: It was during his 1996-1998 premiership that “Japan disease” really set in. After Yamaichi Securities collapsed in November 1997, he threw the full force of government at saving weak entities, papering over bad loans and encouraging the BOJ to prop up growth, underperforming executives and timid lawmakers beginning a borrowing binge that would earn Japan a lower credit rating than China.

Masaru Hayami: The father of quantitative easing came to the BOJ (1998-2003) after running Nissho Iwai Corp., one of the huge, labyrinthine trading companies at the core of Japan Inc., with tentacles around everything from shipping to steel to tobacco. Hayami brought a similar strong-sectors-support-unprofitable-ones ethos to the BOJ. His zero-rate gambit took the onus off politicians to restructure the economy, tackle excesses and raise competitiveness — problems with which Kuroda is grappling today.

Eisuke Sakakibara: The acerbic former vice minister for international affairs (1997-1999) is an economic rock star in Japan and darling of foreign news outlets. Known as “Mr. Yen” for his uncanny ability to influence exchange rates, Sakakibara popularized a policy matrix in which Kuroda is still stuck. A weak currency may work for Argentina, but in a highly developed economy it deadens the urgency for change. It’s a massive corporate welfare program for complacent executives. It’s no coincidence that Kuroda replaced Sakakibara in 1999 at the Finance Ministry and today, at the BOJ, sees a weak yen as key to ending deflation (it’s not).

Junichiro Koizumi: One of Japan’s longest-serving leaders (2001-2006) pulled off a few big reforms: pressuring banks to dispose of bad loans, curbing wasteful public works spending, naming the first female foreign minister and privatizing the sprawling postal system. But the man who could’ve been Japan’s Margaret Thatcher or Joseph Schumpeter became distracted and neglected to cement his reform drive. He handed the keys to protege Abe, who served just one year as prime minister from 2006 to 2007. Abe put Koizumi’s blueprint in the drawer, pivoted to nationalistic pursuits and the malaise returned.

Yukio Hatoyama: September 2009 was an epochal moment for Tokyo as the Liberal Democratic Party lost power for only the second time since 1955 (the first was only for a year, from 1993 to 1994). His Democratic Party of Japan promised to support the people over giant corporations, cut graft and waste, rein in the change-adverse bureaucracy, increase child care and scrap the LDP’s “construction state” model. It erred fatally by naming the hapless and erratic Hatoyama as prime minster (he lasted just 265 days). The party never recovered and, within three years, Abe’s LDP was back.

Shinzo Abe: Had Abe used the best window Japan had in decades to right the many wrongs of the past, Kuroda might’ve avoided joining him on our deflation Wall of Shame. Kuroda’s historic easing was meant to set the stage for the deregulatory big bang Tokyo put off for 27 years. By betting it all on the BOJ, Abe repeated the mistakes of failed reformers before him. The real shame is that as the world looks to Kuroda this week, the man is out of options. Abenomics, too.

Based in Tokyo, William Pesek is executive editor of Barron’s Asia and writes on Asian economics, markets and politics. www.barronsasia.com