The moment of the deer in the lighthouses that the governor of the Bank of Japan, Haruhiko Kuroda, passes through is only painful to watch. This is a transparent risk and provides customers in Asia’s second largest economy.
The yen’s adventure to 150 to the dollar is believed to be a risk for Japan in 2022. Attention tends to focus on how inflation rises at a rate of 3%, by certain measures. That’s well above the BOJ’s 2% target. and a global move away from the deflation that was in the air just 12 months ago.
The U-turn makes global markets wonder what Kuroda is doing through status, while central bankers raise interest rates virtually everywhere. The widening divergence between Japanese and U. S. yieldsOr even 170, as former Japanese Vice Finance Minister Eisuke Sakakibara, widely known as “Mr. Yen,” warns?
Seeing Kuroda’s calm turns out to recommend that Sakakibara and other yen bears are overestimating the risks. However, the real challenge is one that too many economists ignore: how bad Japan can be in 10 years if the BOJ doesn’t avoid feeding the economy unlimited steroids. .
If time were possible, it would be desirable to go back to the 2006-2007 era of BOJ policymaking and stay the course.
It was two BOJ governors ago, when Toshihiko Fukui was leading the way at the central bank’s headquarters in Tokyo. When he took the reins in 2003, Tokyo was 3 years away from the world’s first experiment in quantitative easing. Fukui was high time to rid Japan of the intensive care unit. QE, after all, was intended to bring the economy back from some kind of near-death experience. It was never intended to be permanent.
Fukui began to decrease the dose of cash. Then, in July 2006, it officially raised rates. Then, at first in early 2007. As expected, the empire retaliated. Investors, banks, businesses and politicians howled in protest. Before long, Fukui became defensive. Rate hikes have stopped.
The Bank of Japan (headquartered pictured above) tells Japan Inc. , and the world, that 0 is a conversion strategy.
In 2008, Fukui’s successor, Masaaki Shirakawa, acted first to reduce rates to 0 and repair some elements of QE. In 2013, Kuroda hired to streamline things. He accumulated bonds, stocks and other assets. In 2018, the BOJ’s balance sheet exceeded the length of the entire Japanese economy by $5 trillion, a first for a Group of Seven country.
Imagine, however, if Fukui’s efforts to normalize Japan Inc. ‘s relationship. With welfare guaranteed through the central bank they would have lasted.
U. S. economists who lament former Federal Reserve Chair Janet Yellen’s reversal of the “Fukui moment” will perceive this exercise. Starting in 2015, Yellen ended the crisis-era QE of Lehman Brothers and began raising rates.
When Jerome Powell took office in 2018, he stayed the course of Yellen’s rate normalization regime. Until then, President Donald Trump had threatened to fire him. What if Powell had done his job, ignored Trump and resisted rate cuts?
This simulation is even more irritating to today’s BOJ observers. If Japan had abandoned its reliance on BOJ cash 15 or 16 years ago, Canon, Sony, Toyota and other giants of Japan Inc. they would have abandoned their dependence on BOJ cash building their competitive, cutting-edge games. The succession of governments that have led since the mid-2000s would have been forced to do their homework and implement ambitious structural reforms.
Instead, elected officials and bosses were able to do the bare minimum. All of them have become accustomed to returning to the BOJ ATM, again and again. All this generosity has allowed Japan to postpone big decisions for the future. In 2022, the ship continues.
Because Japanese CEOs continue to live from one currency hit to the next, knowing there’s more to where it comes from, there’s no explanation for why to take risks, do heavy lifting, or look for something different. Thus, a policy to help zombie corporations has zombified the entire G7 economy.
Now, Kuroda is telling Japan Inc. , and the world, that 0 is a conversion strategy. And for the yen to become a weight before our eyes is fine.
It is true that an increase at this time would be too destabilizing to consider. But the idea that Kuroda is changing in terms of new methods is deeply troubling. Even a cosmetic rebalancing of asset purchases, or the mere trail of an upcoming rebalancing, may remind the global that Tokyo’s politicians still have a pulse. And that the yen is heading toward 160, or more, is acceptable.