One year into its risky experiment with monetary easing, Japan has a confidence problem on its hands.
Let's dispense with all this "Abenomics" stuff. Until Prime Minister Shinzo Abe serves up even just one of the epochal reforms he promised 15 months ago, Japan's drive to end deflation and restore growth should bear the name of the man doing all the heavy lifting and taking all the risks: central bank Governor Haruhiko Kuroda.
As he marks his first anniversary at the Bank of Japan, Kuroda has some remarkable achievements under his belt: altering perceptions about the economy's prospects, producing a touch of inflation and keeping bond traders from panicking. Japan, after all, has the world's biggest debt burden among developed nations and some of the lowest yields -- just 0.6 percent for 10-year bonds. In the hands of a lesser monetary official, the BOJ's move to double bond purchases a year ago could have gone disastrously.
But this program needs a reboot. The best proof comes from the Cabinet Office, which reports that only 22 percent of Japanese think the economy is heading in the right direction. That may be the highest since 1998, but almost 80 percent of the population still lacks confidence in Abe's chances of success. Japan doesn't just face structural barriers to faster growth; it's suffering attitudinal ones, too.
The BOJ can turn matters around by doing three things immediately: increasing its bond purchases, becoming more creative with its monetary experiment, and shaming Abe to do his part, which is more important than the central bank's.
The case for the first step is amply made by a Brookings Institution study by economists Joshua Hausman and Johannes Wieland, which cites Tokyo's "lack of credibility." What's missing? Inflation expectations are difficult to ignite in an economy facing competitive threats from China and a fast-aging population more prone to save than consume. Creating expectations of rising prices, and the virtuous cycle that follows, is a confidence game. Until consumers believe, they won't spend more. If companies don't trust that things will be thriving 12 months from now, they won't invest, hire or increase wages. Hausman and Wieland say more "large-scale asset purchases" would help.
Paul Krugman was an early proponent of Kuroda's aggressive efforts to end the liquidity trap perpetuating deflation, holding it up as model to others. Now, the Nobel laureate worries that Japan is among the nations stuck in a "timidity trap." In a recent New York Times column, Krugman cited the arbitrariness of the central bank's 2 percent inflation target, which he argues is "lower than the situation really demands. And this increases the risk that Japan will fail to achieve liftoff."
Second, Kuroda can't wait for commercial banks to start lending. Near-zero rates aren't paying off because banks are content with holding government bonds. Monetary stimulus only matters when the lending multiplier has a chance to kick in. To get credit flowing, Kuroda should make the case for a special tax on excessive bondholdings.
Third, Abe must do his part. None of his promises to alter the corporate tax code, improve gender equality, lower trade barriers, open labor markets and craft a more rational energy policy have been fulfilled. If the prime minister wonders why Japanese icons such as Toyota Motor Corp. are increasing base wages by a piddling $19 a month, he should look in the mirror.
What's needed from Abe is a fresh commitment to restructuring, and Kuroda is just the man to get it. Abe chose Kuroda for the gravitas he brought to the BOJ. And the former Ministry of Finance bigwig and Asian Development Bank president did just that. It's doubtful any other Japanese official could be counted on to produce inflation without inciting a bond-market crash.
But the inflation Japan has gotten so far is the bad kind. With all of Japan's nuclear reactors offline, the country is importing huge of amounts of liquefied natural gas and coal at elevated prices. Higher fuel costs come as Japan raises the sales tax by 3 percentage points, starting next month. Both are big blows to households, businesses and Kuroda's odds of boosting confidence.
Kuroda might be able to cajole Abe out of Krugman's timidity trap. In private, Kuroda should play the honest broker that central bankers do in the U.S. and Europe, speaking truth to power. The message: If you fail to do your part, Mr. Prime Minister, all I'm doing is creating another asset bubble. In public, Kuroda should tie the deflation fight directly to structural changes. Unless he does, Abenomics won't work and it might take Kuroda's good name with it.
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