Tapering 101, Courtesy of Japan
Those Federal Reserve governors pushing Ben Bernanke to end quantitative easing should do what he’s already done: study Japan.
In 2006, Toshihiko Fukui, the Bank of Japan’s governor at the time, tried his hand at the monetary tapering the Fed is considering. It didn’t go well, and Japan’s deflation-plagued economy is worse off for Fukui’s policies in 2006. Those missteps offer a lesson to the Federal Open Market Committee, which today wraps up a two-day meeting: don’t let ideology cloud economic reality.
In March 2006, Fukui scrapped the BOJ’s quantitative-easing program, pointing to signs economic growth was picking up. His tapering campaign began with reducing purchases of short-term government bills during the next four months, followed by less support for longer-term bonds. The Nikkei 225 Stock Average fell 20 percent between April and June as investors both adjusted to less liquidity and questioned just what the BOJ was thinking with deflation still deepening.
Then Fukui really erred. In July, he raised the benchmark rate for the first time since August 2000. That 0.25 percent increase was followed by another in February 2007, putting the overnight-lending rate at 0.50 percent even as consumer prices continued to slide. Fukui’s worries about inflation made zero sense to BOJ watchers.
Bernanke & Co. should consider a quote I ran from David Cohen of Action Economics in December 2006: “Why are they in such a hurry? The Bank of Japan keeps saying they have to be ‘forward looking,’ but give me a break -- prices aren’t exactly spiraling out of control.” Substitute the word “Fed” into that quote today and the question stands.
Fukui could have gone in one of two directions: normalizing interest rates or ending deflation once and for all. By bowing to the doctrinaire economic intelligence clamoring for the former, Fukui succeeded in neither. The first action of his successor, Masaaki Shirakawa, was a return to QE. Fukui’s tapering mess set the stage for current Governor Haruhiko Kuroda’s historic bond-buying spree and rising market risks.
Kuroda’s doubling of the monetary base is abetting the resolve of hedge-fund managers shorting Japanese debt, including Kyle Bass of Hayman Capital Management LP in Dallas. Now, more than ever, Bass thinks a widening trade deficit and a plunging yen will trigger a devastating surge in yields in Japan’s $12 trillion bond market.
Bernanke, of course, made part of his reputation studying the onset of Japan’s deflation in the 1990s. So, presumably, he knows history may look even less kindly on the slipups of 2006 than efforts to prick Japan’s asset bubble in the late 1980s.
Fukui delivered a self-inflicted wound on Japan. Bernanke must be careful to do better by Americans.
The stakes for Bernanke are much higher. Unlike the BOJ, the Fed is the world’s central bank and investors from Seoul to Santiago often care more about what happens in Washington than they do about actions taken by local monetary authorities.
As the Fed eyes an exit strategy from QE, it must be careful to find the right one for the good of the global economy.
(William Pesek is a Bloomberg View columnist. Follow him on Twitter.)