The Bank of Japan: Not as Powerful as Tokyo Thinks

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By William Pesek

Want to know why Japan's two-decade-long funk has stretched into a third? This week's focus on the Bank of Japan offers timely clues.

The central bank expanded its plan for government-bond purchases by 10 trillion yen ($124 billion) after growth slowed and lawmakers pressed for more aggressive steps. The BOJ is under increasing pressure as the yen rises, growth underwhelms and the next leg of Europe's debt crisis gets underway.

And that's exactly the problem: All eyes are on the BOJ, not the politicians in Tokyo who are doing nothing to stimulate the world's third-biggest economy.

This pattern has been playing out since Japan's asset bubble burst in the 1980s, and it's holding the nation back. If printing yen alone were the key to revival, Japan might be growing faster than China. The BOJ has held interest rates near zero for more than a decade now. It's gone even further into uncharted monetary territory with a variety of quantitative easing and asset-purchase programs. In February, it announced a 1 percent inflation target.

Yet Japan's credit system is broken. The problem isn't the supply of yen, but uses for it. Banks are reluctant to lend; companies and households aren't borrowing. The multiplier effect that makes monetary policy so potent is eluding Japan.

The missing ingredient is confidence. Until corporate executives and consumers believe the next 10 years will be more prosperous than the last, deflation will deepen. The government must do its job to create incentives to add jobs and raise incomes.

Unfortunately, Prime Minister Yoshihiko Noda's team is focused elsewhere: raising taxes. A hike in the consumption tax to 10 percent over the next three years is meant to help pay down a public debt that's more than twice the size of the economy. It will slam consumption, though, worsening Japan's woes.

Japan needs to raise productivity, increase immigration, get serious about signing free-trade agreements, improve corporate governance, better utilize its female workforce, stimulate ground-up entrepreneurship and up the national birthrate.

What are politicians doing instead? Leaning on the BOJ -- again. Nice try, but it won't restore vibrant growth anytime soon.

(William Pesek is a Bloomberg View columnist. Follow him on Twitter.)

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-0- Apr/27/2012 14:46 GMT