Japan Turns Again to Bernanke, as Fruits of Abenomics Wither

  • BOJ board holds next scheduled meeting on July 28-29
  • Bernanke visit comes as Abe is preparing fiscal package

Moving Japan’s Growth Agenda to the Next Level

Less than three weeks before the Bank of Japan’s next scheduled policy meeting, Governor Haruhiko Kuroda met with former Federal Reserve Chairman Ben S. Bernanke over lunch on Monday.

The BOJ issued no statement on the substance of the talks, which come as the central bank confronts a fresh strengthening in the yen this year that risks undermining inflation and weakening the appetite for investment and wage increases. Prime Minister Shinzo Abe will meet Bernanke at 3 p.m. local time on Tuesday, according to Abe’s office.

For Bernanke, offering views on Japan’s challenges and policy options would be nothing new. He delivered a famous 2003 speech calling for greater cooperation between monetary and fiscal policy makers to defeat deflation and spur the economy.

In the room during Bernanke’s meetings with Japanese officials 13 years ago in Tokyo: Abe and Kuroda, who a decade hence unleashed an unprecedented stimulus to revive Japan. Now, that project is increasingly at risk with inflation moving away from the BOJ’s target, and gross domestic product growth far from Abe’s goals.

Bernanke’s 2003 visit, when he was a Federal Reserve Board member, and his message at the time is still discussed by BOJ officials. Japan has a tradition of seeking the advice of overseas experts, something that’s been taken to a new level under Abe, who consulted with Nobel laureates Paul Krugman and Joseph Stiglitz prior to his decision in June to delay a sales-tax hike. Unlike with this week’s Bernanke visit, the meetings with Krugman and Stiglitz were well-publicized.

This time, the former Fed chief, whose roles now include that of a fellow-in-residence at the Brookings Institution in Washington, come at a tough moment for the BOJ. While Kuroda’s initial 2013 stimulus succeeded in sending down the yen -- boosting exporters’ profits and inflation -- his most recent strategy has faced popular disapproval.

In a surprise move in January, the BOJ unveiled a negative interest-rate policy that commercial banks have criticized for hurting their profits and damaging confidence. Meanwhile, bond market participants and some former BOJ officials have criticized the core of Kuroda’s program -- massive purchases of government debt -- for damaging the function of the bond market.

There has been no sign yet from Kuroda and his colleagues that he is looking for a new means of stimulating the economy. On the fiscal front, Abe is preparing a spending package to be completed later this year, with no details on the size or the funding.

Bernanke in April published on his Brookings blog that, while there were many challenges behind such a strategy, a “monetary financed fiscal program” shouldn’t be ruled out in the case of an emergency in the U.S.

Extreme Scenario

“Under certain extreme circumstances -- sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies -- such programs may be the best available alternative. It would be premature to rule them out,” Bernanke wrote.

Hiroaki Muto, chief economist at Tokai Tokyo Research Center, said Bernanke’s visit to Tokyo will spur speculation over further monetary easing by the BOJ.

“The BOJ probably won’t be able to do nothing and stand pat at its July meeting,” Muto. said. “It may have little choice but to take additional steps.”

In Muto’s view, these steps could include a deeper cut to the negative interest rate or increased purchases of exchange-traded funds.

Watch Next: A Peek Inside Japan's Fiscal Stimulus Package

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