A young Japanese of 23 has never known anything but a wheezy, punked-out, slump-shouldered Japan—a country that has been in and out of recession and deflation since its famous bubble burst in 1990. Now this is supposed to change—big time. Analysts are calling the Bank of Japan’s new stimulus strategy wheeled out, the boldest experiment a central bank has ever undertaken.
The BoJ intends to double the nation’s monetary base, from ¥135 trillion ($1.43 trillion at the moment) to ¥270 trillion, or $2.86 trillion, by the end of next year. Anything more aggressive would require Prime Minister Shinzo Abe, architect of this startling, if risky scheme, to load a fleet of semi-trailers full of ¥10,000 yen notes and park them in Marunouchi, the section of Tokyo where Japan’s biggest banks and corporations reside.
This is monetary stimulus on an unprecedented scale. If it works—and there is a good chance of it—Japan could have a significant influence on recovery strategies around the world, notably in the European Union.
Abe and his new central bank governor, Hirohiko Kuroda, think a policy of this daring and magnitude is required in the Japanese context, and they may be right. They cannot ignore the risks, however, for these reasons:
• It does not generate the confidence that is its core goal.
• It raises Japan’s public debt, already at 220 percent of gross domestic product – the highest among the G-7.
• The yen keeps falling—and falling and falling in a dangerous downward spiral.
• Finally, will “Abenomics” create more of those fearsome, unproductive asset bubbles, notably in property.
The immediate intent of Abe and the BoJ is to raise Japan’s inflation target from 1 percent to 2 percent. This is supposed to get consumers out spending, businesses investing, banks lending, and exporters (as the yen loses value) exporting. In February, so you understand the starting point, inflation came in at minus 0.7 percent, putting another month of deflation on the books.
Now, a 2 percent inflation target may not seem so dicey. But we are talking about the world’s most conservative central bank. Amid the oil shocks of the 1970s, Japanese consumer price inflation hit 25 percent. The BoJ has been a touch paranoid ever since. Equally, you have to look at proportions—specifically that –0.7 percent figure. Tokyo intends to prompt an inflationary surge that has prices rising at more than twice the rate they are now falling. “Might as well spend it now” is the sought-after sentiment.
How is it going to do this? The central bank intends to boost its monthly purchases of Japanese government bonds from ¥3.8 trillion ($389 billion right now) to ¥7.5 trillion, or $768 billion. Among all classes of investors, JGBs are considered the safest parking place in town. In effect, the central bank wants to force institutions and individual investors out of the government bond market and into riskier, more productive assets, such as stocks and corporate bonds.
For its part, the government intends to spend some $100 billion on public works projects as the other section of an economic stimulus strategy. It is exactly right, this idea. Japan has more concrete and bridges to nowhere than any country I know—most of it out of the pork barrel. But setting that aside, wise spending on public works is highly effective stimulus in almost all circumstances. While U.S. bridges and roads decay, we Americans are paralyzed on this point.
For the BoJ, Abenomics represents a big shift. Abe had to replace Kuroda’s predecessor to get the new inflation target through. Equally, the bank has changed its policy platform, in place for decades, from a rigorous focus on inflation to a more central position for monetary policy. This is no small deal. It suggests a new, growth-first philosophy of economic management.
But the thought of easy money is not in itself novel. It is not even Japan’s. In essence, Abe and Kuroda are taking Fed Chairman Ben Bernanke’s “quantitative easing” policy and setting it in a Japanese context. And context is all. The BoJ’s bond buying, at $768 billion a month, will be roughly twice the scale of the Federal Reserve’s operation. In effect, what we are about to witness is Bernanke on steroids.
Will it work? Everyone is asking this just now. I see more positive signs than negative. The yen has lost 10 percent against the dollar this year, which is sure to help Japan compete against other Asian exporters. The Tokyo stock market, as measured by the Nikkei average, is up nearly a third so far this year, breaking through 13,000 last week for the first time since 2008 and suggesting there’s plenty of expectation among investors about the benefits of Abenomics.
But the picture is not complete. Consumers have yet to join the party, and a quarterly economic report issued just last week indicates that corporate Japan remains in the wait-and-see zone. These are key features of a recovery. It is among consumers and businesses that Abe’s risk lies. If they are not persuaded to begin spending after years of holding back, Abenomics will go down as another failed experiment—but one with a much higher price tag.
On the debt side, Tokyo will effectively inflate away some of its debt, and increased tax revenues from a livelier economy will offset the BoJ’s spending in the JGB market. But that will also take a toll on foreign tourism and exports.
As to bubbles, Abe and Kuroda have already indicated that they are going to keep a tight hold on the spigot over at the BoJ. They will increase the flow of yen yet more if they need to, and for sure they will slow it down if bubbles such as those of the late–1980s materialize. Tokyo remembers them as it does the hyper-inflation of the mid–1970s.
Footnote: At the Fed, Bernanke has given no indication of change since Japan unveiled its super-stimulus package last week. Chances are he won’t. But watch the Europeans. European monetary policy is strongly colored by German thinking, and the Germans have historically been as spooked by inflation as Japan. So far, the European Central Bank’s benchmark interest rate remains unchanged, at 0.75 percent. But there is talk now of a drop in the near future. It would be a sensible move.