Weird Adventures in Japanese Central Banking

A discount store in the area of Shibuya in Tokyo, Japan, on March 1, 2013 Photograph by Noriko Hayashi/Bloomberg

Hey, these guys in Tokyo are serious. After two decades of studied inaction, the Bank of Japan’s new governor, Haruhiko Kuroda, has just announced shock and awe monetary targets for Japan. You might call it quantitative easing on steroids—or at least fueled by some very fine Niigata sake.

Kuroda aims to double the country’s monetary base by 2014 through increased purchases of Japanese government bonds. The planned ¥7.5 trillion ($75 billion) of monthly bond purchases would expand the bank’s balance sheet at a rate faster than that of the U.S. Federal Reserve, which has also adopted an ultra-loose monetary strategy, according to Masaaki Kanno, a former BOJ official and chief economist at JPMorgan Securities Japan.

There’s more: Kuroda plans to accelerate the central bank’s purchases of real estate investment trusts and exchange-traded funds. He’s fully committed to delivering on Prime Minister Shinzo Abe’s 2 percent annual inflation target. It all adds up to a serious effort to revitalize Japan’s economy, which has been beset by periodic bouts of deflation and basically flat-lining for two decades. Taken together, all this liquid refreshment has global investors viewing Japan as the mother of all reflation plays. The Nikkei has gained about 45 percent since November and 21 percent so far this year.

Yet here’s the fascinating thing about this excellent adventure in central banking: Can Japan really reverse the spending and investing behavior of individuals and companies that have spent the past 20 years living in a deflation nation?

The Bank of Japan’s working theory is that consumers will start spending if they think the price of a home or large, high-definition television will be higher six months from now. Businesses will start investing if Japanese households see their wealth rise from a robust stock and housing market. The BOJ’s bond-buying campaign will also give Japan’s debt-heavy government more latitude to spend.

Yet the reality is that the Japanese have lived through four recessions, numerous stock market busts, on-and-off deflation, and falling wages for the last 15 years or so. The psychology of hard times has become ingrained in an entire generation of Japanese who entered the workforce in the early 1990s.

Turning that around will take a multiyear effort and a sustained run of prosperity to convince workers that their jobs are secure and their incomes will improve enough to take the risk of spending more. The same goes for Japanese companies looking at the country’s rapidly aging demographics and think, ‘Hey, let’s invest in Vietnam.’

The world should welcome the fact that Japanese policymakers have started getting serious about reviving their economy. If Japan can somehow pull this off against long odds, Abenomics will be enshrined in university macro-economic textbooks the world over. Wish them luck.

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