It’s Paul Volcker time for Ben Bernanke and Masaaki Shirakawa.
The heads of the Federal Reserve and Bank of Japan are facing waves of hostility from politicians, perhaps of a virulence not seen since Volcker ran the Fed from 1979 to 1987. Bernanke is getting beaten up for doing too much; his third round of quantitative easing enraged Republicans. Shirakawa is a human pinata for doing too little.
What if the world’s two most powerful central bankers could learn from each other how to be smarter and boost economic growth?
Some will take exception to the suggestion that the BOJ trumps the European Central Bank. But the ECB’s mandate is too restrictive and ideologically tied to the Bundesbank of old to play the global role that the euro’s founders anticipated. The BOJ is the glue holding together the biggest public debt of any developed nation. A meltdown in Japanese bonds could dwarf Europe’s current woes.
The issue for Bernanke is to look where quantitative easing failed first. He did, of course, even before the practice formally existed. The Fed chairman made his mark at Princeton University with papers such as “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” in 1999. He applied those lessons to America’s own brush with a depression in 2008.
Fresh insights can be gleaned from Japan. The notion that buying financial assets from banks and other private institutions adds oomph to monetary policy was born in the country 11 years ago. It has been a flop. Just ask Japan’s newest finance minister, the fifth to hold the job in three years. I debated whether even to mention Koriki Jojima’s name here. You have to wonder how long this one will be around.
It is no mystery why finance czars keep falling on their proverbial swords: The economy is no healthier than it was in 2001, when Japan’s central bank invented “QE.” Why? Because the BOJ never fully embraced QE as it was originally envisioned.
The main criticism of former BOJ Governor Masaru Hayami, who held the job from 1998 to 2003, was that he didn’t pump enough yen into the economy to generate inflation and growth. In reality, his mistake was that he didn’t take lenders’ toxic assets onto the BOJ’s books so banks could return to the job of credit creation. Hayami focused, instead, on relatively conventional open-market operations to lower interest rates. The amount of liquidity increased, but confidence among bankers didn’t.
“It’s like filling a bath with the plug out,” says Nicholas Smith, a strategist at CLSA Asia-Pacific Markets Ltd. in Tokyo.
Hayami’s successor, Toshihiko Fukui (2003-2008), made the BOJ’s drain even wider. Under him, broad money growth faltered and the yen surged. And let’s not forget Fukui’s ill-fated decision in 2006 to begin raising interest rates. The only time a recent central banker erred worse was when ECB President Jean- Claude Trichet boosted borrowing costs in 2008 as markets were crashing. Shirakawa’s first job when he took over was to drive interest rates back to zero.
Bernanke’ QE program has a much better chance of working because it relies on boosting consumption by lifting asset prices, particularly for housing. As home values stabilize, so will Americans’ perceptions of their economic plight. The trouble is that each QE dose loses its effectiveness unless it is carefully calibrated to reach new asset classes.
“At the moment, it’s about curing a hangover by staying drunk,” Smith says. “QE’s ability to drive share prices, currencies and commodities is tapering away with less predictable results.”
Unless the Fed sees to it that the reach of its largess increases, the only clear beneficiary is the price of gold. Getting traction is crucial and the good news is that Bernanke’s QE has gotten considerably more than the BOJ’s. There also is time for the Fed to give banks incentives to extend credit.
Herein lies the lesson for Shirakawa. Currency traders yawned last month when the BOJ added $128 billion to its asset- purchase fund. Everyone gets the joke that the BOJ is impotent - - everyone except Shirakawa.
Japan’s government needs to do its part to restore business and consumer confidence, particularly after last year’s devastating earthquake. Yet it is a waste of time to print money that won’t be used. Why not penalize banks that pour all of the BOJ’s liquidity into government bonds? How about tax incentives for bankers who actually lend? Purchase longer-dated bonds? Buy foreign debt to weaken the yen? Try something new, or Japan will still have deflation in 2022.
Next week, when Bernanke arrives in Tokyo for the International Monetary Fund’s annual meeting, he and Shirakawa should compare notes. Perhaps they could invite Volcker along to do some brainstorming. They could do worse than learn from the man who restored oomph to central banking.
(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)
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