The Bank of Japan Can’t Jump-Start Inflation
On May 29 the Japanese government announced that the country’s consumer prices were unchanged in April from a year earlier, calling into question the power of the central bank’s effort to drive prices upward. The BOJ is acting a bit like a hedge fund, trying any investment to achieve its goal of raising inflation to 2 percent. It’s snapping up not only government bonds but also exchange traded funds, corporate bonds, real estate investment trusts, and venture capital loans—anything to put more money into lenders’ and investors’ hands so they can lend and invest more. “The BOJ deserves the most aggressive award among central banks,” says Yasuhiro Takahashi, a senior economist at Nomura Securities.
The latest consumer price report underscores the difficulty of the central bank’s task. BOJ Governor Haruhiko Kuroda doubled down last October and expanded his policy, formally known as quantitative and qualitative monetary easing. The central bank pledged to raise the monetary base from 60 trillion yen ($482 billion) a year to 80 trillion yen to give banks more money to lend.
The heroic effort has driven the Nikkei 225 Stock Average to a 15-year high and the yen down to almost a 12-year low against the dollar. Although that’s delighted stock investors and big exporters such as Toyota Motor and Shiseido, it hasn’t moved the needle on overall growth or inflation. A majority of 36 economists surveyed by Bloomberg see the BOJ beefing up its program by late October, when it’s expected to update its inflation forecast. If that’s less than 2 percent, the bank will pile on extra stimulus.
Nomura predicts the central bank will switch its focus from bonds to stock purchases next spring, betting a bull market might more effectively stimulate consumer spending. The brokerage sees the BOJ doubling its ETF purchases, to 6 trillion yen, while announcing plans to taper its bond purchases.
Kuroda has said that the plunge in oil prices in the short term delayed progress on generating inflation and that rising wages will engender growth, consumer spending, and higher prices. “It’s really too early to say Kuroda’s easing didn’t work,” says Takahiro Sekido, a former BOJ official who’s now a strategist at Bank of Tokyo-Mitsubishi UFJ.
Japan faces structural challenges, given its aging, shrinking population and its debt burden, the biggest in the developed world. “The BOJ’s policy has been and must be more ambitious,” says former Fed Vice Chairman Donald Kohn, now at the Brookings Institution. “It’s not going to be easy to break expectations [of deflation] that have been entrenched over the decades.”
Fiscal conservatives question the BOJ’s bond-buying, which soaks up about 90 percent of all new government bonds issued to keep long-term rates low. If long-term rates returned to their historical average of 3 percent, from 0.4 percent now, the higher interest payments would push the budget deficit from 8.5 percent to 13 percent of gross domestic product, according to the Organisation of Economic Co-operation and Development. “The BOJ is approaching its limit in bond purchases,” says Nomura’s Takahashi.
Kuroda continues to enjoy the steadfast support of Prime Minister Shinzo Abe, who picked him to run the BOJ in 2013. Abe, though, has so far failed to deliver on the promised labor, tax, and regulatory reforms that economists say are needed to get Japan back on track. Monetary firepower alone won’t revitalize the economy.
The bottom line: If long-term rates return to a more normal 3 percent, Japan’s budget deficit could rise to 13 percent of GDP.