How the Bank of Japan can get really crazy

How the Bank of Japan can get really crazy


Bank of Japan (BoJ) Governor Haruhiko Kuroda is watching his back even more than he's surveying for hints of inflation in the world's third largest economy.

The knives are out for the most famous economist in Tokyo, and why isn't hard to figure out.

With Prime Minister Shinzo Abe's approval ratings lower than Donald Trump's, Japan's leader is desperate for a win.

Voters might look beyond the latest cronyism cloud over this government if wages were rising and the economy was humming along five years into Abenomics.

But wages aren't rising so Abe is looking where embattled Japanese leaders always do when the going gets tough: the BoJ.

Tokyo tongues are wagging as Abe advisors Nobuyuki Nakahara and Etsuro Honda (who's called for "regime change") suggest Kuroda should go.

Koichi Hamada, a key Abenomics architect, wants the governor to get a second term come March. Kuroda is clearly being nudged to step on the monetary gas anew - or clean out his office.

That could mean another round of shock-and-awe easing and a sharply weaker yen.

As Kuroda's BoJ comes up short in generating inflation, what are its options?

Obviously, Kuroda needs a major assist from Abe. The BoJ's historic easing, its cornering of bond and stock markets, was meant to grease the skids for a deregulatory Big Bang.

But steps to loosen labor markets, encourage entrepreneurship, modernize the tax code, empower women and boost productivity are few and far between.

Lacking confidence, companies are sitting on trillions of dollars of cash rather than fattening paychecks or investing in new industries.

The stink of scandal distracting Abe's team, and buzz about another Cabinet reshuffle, has all eyes on the BoJ.

The Oxford-trained Kuroda has resisted going further down the quantitative-easing path, lest the BoJ enter People's Bank of China territory.

But then, one could argue the BoJ, which has been at zero rates and beyond for 20 years, is about as independent as indentured servant. In other words, why stop here?

Fire up that helicopter: The BoJ's titanically large purchases have immobilized the government bond market, in which volatility has become a rare phenomenon.

Its massive purchases of exchange-traded funds -- about $53 billion annually -- are distorting the stock market.

The BoJ should aim its firepower elsewhere. Kuroda could buy up large blocks of mortgage-backed and asset-backed securities. He could load up on tens of billions of dollars of corporate debt or foreign bonds to weaken the yen.

Why not also take local-government debt onto the BoJ's balance sheet?

Look at the weakest among Japan's 47 prefectures and offer them fiscal space to borrow anew to cultivate startup booms, finance improvements in productivity or pay for infrastructure improvements.

Next, Kuroda could get really creative and buy up distressed properties to refill rural government coffers. He could overpay for plots of unused municipal land, white-elephant city-hall buildings, stadiums, museums, desolated ski resorts, amusements parks and those infamous "international" airports with one overseas flight.

Go the full Takahashi: The BoJ could monetize debt the way Tokyo did in the early 1930s under then-Finance Minister Korekiyo Takahashi.

He also ran the BoJ for a time and later rose to the premiership. But first, he veered Tokyo in the highly unorthodox direction of nationalizing public IOUs.

His exploits returned to prominence in June 2013, when Abe claimed to be "emboldened" by Japan's answer to John Maynard Keynes.

So controversial was Takahashi's reflationist gambit that it got him assassinated.

Thing is, Japan's $4.8 trillion economy is carrying a $10 trillion-plus debt load amid tepid growth, deflation and shrinking population, one expected to fall by about one-third by 2065.

Unless Tokyo suddenly learns to grow 8% or more for many years to come and a level of fiscal sobriety it hasn't exercised in decades, it can't pay that debt.

Early in his tenure, Kuroda channeled European Central Bank President Mario Draghi when pledging the BoJ would "do whatever it can." Well, here we are.

BoJ debit cards?: Yes, this suggestion is the stuff of Karl Marx -- literally handing out piles of free cash that households then spend to boost demand.

It does sound vaguely like cheating, doesn't it? The BoJ's biggest problem is that banks take liquidity and pile it into bonds instead of lending.

That robs Japan of the multiplier effect that's the source of central banks' magic. Nor are companies borrowing, investing or sharing profits with consumers.

Imagine, for example, if after the subprime crisis the US Treasury Department had bailed out underwater households instead of banks.

Ultralow rates are shoring up balance sheets, but doing zero to enliven households.

So, as economists like Gabriel Stein of Oxford Economics have recommended, issue BoJ debit cards to every consumer and force them to spend the balance of, say, $5,000 at a time before getting a monetary refill.

Sound fanciful? Perhaps no more than telling economists 20 years ago that Japan would be where it is today: still down the deflationary rabbit hole. Whatever it takes, right? 

 

 

Published in Daily Times, July 31st 2017.