The success of Prime Minister Shinzo Abe’s sixth year in power is firmly in Bank of Japan Gov. Haruhiko Kuroda’s hands.
That will happen when a national leader outsources the economic-reform portfolio to the central bank. Abe didn’t just hand Kuroda the reins — he fobbed the entire Abenomics enterprise off to the BOJ. History will frown on Abe’s decision to delegate those responsibilities in the BOJ. Therein, after all, lies the explanation for why the best run of growth in 16 years and the lowest unemployment in 23 years aren’t fattening paychecks or defeating deflation.
It explains, too, why Kuroda finds himself in an impossible situation in 2018. Push further into the monetary liquidity unknown and Abe will feel even less pressure to loosen labor markets, catalyze a startup boom or increase national competitiveness. Begin withdrawing — what traders call “BOJ tapering” — and markets might go haywire in ways that imperil the growth outlook.
The answer, of course, is for Abe to get serious about retooling his aging and unproductive economy. Abe’s latest reform thought fragments — like education assistance and setting up new nurseries — will do zero to meet fast-rising threats from China, South Korea and Southeast Asian upstarts. They won’t make corporate Japan any more innovative or entrepreneurs more likely to take risks starting new ventures. They won’t better utilize the female workforce and pull in more foreign talent or long-term investment.
Nor will Abe’s latest ideas protect Japan from the trade war U.S. President Donald Trump spent the waning days of 2017 telegraphing. The ostensible target is China, but Tokyo’s recent vote against Trump’s retrograde Israel policy may put Abe on the enemies list. Staking out a place as Trump’s only friend in the global community may exact a heavy price.
So will the foot-dragging on reform these last 1,825 days. With rare majorities in both Diet chambers, decent support rates and a reflation plan the public likes, Abe should’ve achieved vastly more than a few obvious tweaks to corporate governance that developed nations implemented years ago. Granted, keeping the Trans-Pacific Partnership alive would be a feather in Abe’s cap. But trade deals, remember, tend to lower consumer prices. They aren’t reflationary.
One can hope Abe will use the window afforded by today’s globally synchronized recovery, one that’s even producing signs of life in Europe, to take on vested interests. If we’ve learned anything these last five years, it is not to hold our breaths. Besides, 2018 is the year of revising the war-renouncing Constitution, the raison d’etre for Abe returning for a second stint as prime minister. With his eyes on the big prize, there won’t be much time for economic retooling.
All this explains why Kuroda will be big man of 2018. First, he needs to lock down a second term, one that seems his for the taking. Kuroda enjoys a level of global gravitas arguably no other Japanese economist does. Changing BOJ faces now might do more harm than good. Then, he faces monetary history’s most challenging dilemma: do more or start the perilous process of removing the glue holding the world’s third-biggest economy together.
The odds favor “Kurodanomics” taking the first route. “We won’t raise interest rates just because the economy is improving,” he told reporters Dec. 21. Kuroda’s comment is more instructive than meets the eye. In the 16 years the BOJ has held rates at, or near, zero, there have been many periods of supposed revival — 2003, 2006, 2011, 2015 and today. This current moment of optimism may indeed be the one that foretells surging wages, booming demand and innovative revolution. I’d feel better about it if Abenomics put more reform wins on the scoreboard.
That means Kuroda is more likely to keep his foot on the accelerator than throttle back. Going in the other direction is certainly possible, though it presents myriad risks. Earlier this year, the BOJ’s government debt holdings topped 40 percent. At the end of June, meanwhile, the BOJ’s share of all shares in Japan-listed exchange-traded funds reached 71 percent. How does Kuroda’s team withdraw from either asset realm without considerable financial fallout?
Again, hope springs eternal. Perhaps the Abenomics rubber will soon hit the road. It’s entirely possible 2018 will be the year Abe finds the reformist mojo that eluded his administration for five years, and his previous 2006-2007 stint at the helm of government. Abe has the clout to take on the vested interests standing in the way of a more vibrant and competitive economic landscape. Will he?
More likely, Kuroda will find himself in the driver’s seat, and under pressure to do more to get companies and households to borrow, spend and put deflation in the rearview mirror. That makes him the man to watch — and to root for — in Japan’s year ahead.
Based in Tokyo, William Pesek is the author of “Japanization: What the World Can Learn from Japan’s Lost Decades.”
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