Bank of Japan Governor Haruhiko Kuroda is often thought to have the hardest job in central banking.
Since 2013, he’s built up an incomprehensibly huge $5 trillion balance sheet, one that tops the annual output of Asia’s No. 2 economy. That unprecedented hoarding of government bonds, stocks and other assets began when deflation was Tokyo’s biggest challenge. Today, it’s inflation risks amid surging global commodity prices keeping Kuroda on edge.
All of which makes Kuroda’s job easier than you’d think. His only real option is to do nothing, perhaps until well into next year (including this week’s policy meeting).
If Kuroda does more of what the BOJ has been doing for 20-plus years, opening the monetary spigots further, the yen’s 11% decline this year might accelerate in ways that spook world markets. Throttle back on liquidity and government bonds would quake, while Japan’s stock market could collapse.
With its zero interest rates, quantitative easing and negative-yield innovations, the BOJ has arguably built the best—or surely the most unique—monetary mousetrap around. Unfortunately, it’s gotten trapped inside it.
Really, if debt-plagued Japan wanted to save a few billion dollars each year, it could just shutter the BOJ for a while and turn its monetary functions over to a computer program. The result might be the same. All kidding aside, the BOJ is on autopilot for the foreseeable future.
The answer, of course, is for Prime Minister Fumio Kishida’s Liberal Democratic Party to get serious about reviving Japan’s animal spirits. In 2013, Kuroda was hired as part of what then seemed like a once-in-a-generation deregulatory Big Bang.
Then-Prime Minister Shinzo Abe took office pledging to increase innovation, loosen labor markets, boost productivity, empower women, catalyze a startup boom and woo multinational companies to headquarter in Japan. Abe tapped Kuroda to set the stage for the promised supply-side revolution to come.
It never arrived, making the BOJ the main event. Kuroda found himself having to save the day with massive asset purchases. Now, as Japan imports inflation quicker than BOJ officials expected, Kuroda is finding his monetary cupboard bare and his policy toolbox out of options.
Enter Team Kishida, which now must devise a way forward as bigger and bigger headwinds bear down on Japan.
Again, BOJ asset “tapering” is out of the question. Actual tightening, meantime, seems about as likely as a population that’s been shrinking steadily for years suddenly increasing. That leaves Kishida’s 205-day-old government squarely in the driver’s seat.
Kishida has talked a good game of imposing a “new capitalism” that seeks to rekindle innovation and redistribute wealth toward the middle class. So far, though, he’s put no big upgrades on the scoreboard. That must change, and fast, if Kishida hopes to prod companies to raise wages and kick off a virtuous cycle of increased consumption and growth.
The bottom line is that the BOJ’s $5 trillion stimulus boom backfired. In 2000, the BOJ became the first major monetary authority to cut rates to zero. A year later, in 2001, it was the first to give QE a try. Things shifted into overdrive in 2013, when Kuroda moved to corner the bond markets and stocks via exchange-traded funds, making the BOJ the biggest holder of Japanese public and private markets.
Yet this massive corporate welfare supersized Japan’s “zombie” problem. By flooding markets and helping companies generate record profits, the BOJ deadened all impulse to restructure, recalibrate, rethink or take big risks that might’ve helped Japan regain the global lead in tech, machinery and transport that raised living standards in decades past.
The irony is that in trying to reanimate things, excessive BOJ largess zombified large swaths of the economy. It's an economic horror film that few have seen before.
Kishida’s immediate challenge is safeguarding growth in the current quarter. This week, Tokyo unveiled a $48 billion emergency economic package to soften the blow from rising global inflation, driven partly by Russia's invasion of Ukraine. It’s a worthy use of his government’s time and political capital.
The bigger need, though, is bold steps to increase competitiveness and create more economic energy from the ground up. They’re needed to alter dynamics in a system that’s long been dominated by huge export companies at the top of the economic food chain.
This creates a mismatch between Japan’s desire to play a leadership role in the global economy and where Asia is headed. As India, Indonesia and other Asian economies produce waves of tech unicorns, Japan is punching far below its weight in the startup company department.
Odd as it sounds, Japan would be far better off if the BOJ hadn’t spent decades supporting underperforming sectors, assets and companies. But the incentive structure in the third-biggest economy has been warped by a $5 trillion ATM that continues to churn out unlimited waves of cash.
