New York – In putting a floor under the world's third-largest economy, Japan is going for broke. Minus the broke part.
The central bank has effectively pledged to do almost anything to contain the cost of borrowing, even entertaining proposals that challenge its independence. The rest of the world, including the U.S. Federal Reserve, is watching with great interest. Far from being a policy outcast, Japan may be writing the future.
Tokyo's stimulus barrage this week was replete with superlatives suited to the gravity of the coronavirus pandemic. Prime Minister Shinzo Abe unveiled his second package in two months worth about ¥117 trillion, each installment dwarfing the response to the Great Recession. The extra budget required to fund this fiscal expansion will be a record ¥31.9 trillion. Tokyo's debt load, already the greatest among major economies, will climb.
Even allowing for the padding that typically swells Japanese fiscal headlines — guarantees and money held over from previous budgets — the numbers are impressive. Abe says efforts to combat the deepest global dive since the 1930s will amount to about 40 percent of gross domestic product. This fiscal onslaught won't prevent a big dip in Japan's economy; it will probably mitigate it. Bloomberg Economics anticipates GDP will shrink 3.8 percent this year, compared with a forecast decline of 4 percent before Wednesday's turn of the faucet.
The salvo recalls the halcyon days of Abenomics in 2013, when newly appointed Bank of Japan Gov. Haruhiko Kuroda dramatically expanded the central bank's balance sheet and declared war on deflation. This time, it’s fiscal policy on the offensive. Tokyo's monetary stance has been ultra loose for a while and may get easier still.
That brings us to the consequences of this aggressive budget. In theory, a big jump in spending pushes up the government’s cost of borrowing. But this is unlikely because the BOJ pledged a few years ago to keep the yield on 10-year sovereign bonds near zero. It's even less plausible given that Kuroda has recently emphasized his commitment to so-called yield-curve control.
In a rare joint statement last week, Kuroda and Finance Minister Taro Aso pledged to work hand in glove. "The Bank of Japan and the government must send the message to the world that we are coming together as one.” You don't often hear words like this from a minister and a central banker, who tend to guard their institutional separation zealously.
The specific context is a special lending program for small businesses whacked by the virus, which was announced a few hours earlier. Yet the broader message is powerful. Once you get these kind of statements, monetization of debt might not be far away. Kuroda recoils from the term, as do policymakers the world over, even if he acknowledges that the BOJ greatly influences Japanese rates.
This is what makes its posture so intriguing. New York Fed President John Williams said on Wednesday that he's thinking about yield-curve control. The Fed needs to write a formula that keeps rates down well after the economy begins growing again, given the recovery is likely to be long and slow. We might not see a joint press conference between Treasury Secretary Steven Mnuchin and Fed Chair Jerome Powell pledging love and happiness, but American officials may be on the cusp of a new era.
Monetary veterans have tut-tutted the blurring of divisions. Central banks free of political interference are better equipped to respond to the threat of rising prices. But inflation is yesterday's story; it had been trending lower for decades and now deflation is the predominant issue. The world hasn't faced an economic crisis like this since the Great Depression when few, if any, central banks were as independent as they are now.
That means it’s time to stop seeing Japan as a poster child for policy gone awry. It may be on to something. The Fed leadership certainly thinks so.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.