As the European Central Bank prepares to inject up to a trillion euros into Europe's faltering economy, Mario Draghi would be wise to study Japan's experience with massive quantitative easing. In recent interviews, Bank of Japan Governor Haruhiko Kuroda has come close to admitting that his own monetary "bazooka" hasn't succeeded in jolting the economy out of its deflationary funk. Simply providing liquidity isn't enough; banks and corporations need incentive to tap that money.
That means central bankers such as Kuroda and Draghi need to get more innovative with their policies. For the BOJ, the ripest targets of opportunity could well lie outside Tokyo and the corporate headquarters of Japan's once world-beating companies.
Kuroda and Prime Minister Shinzo Abe have learned the hard way that Japan Inc. has changed too much for traditional monetary and fiscal incentives to work on their own. Having moved many of their operations overseas, Japanese manufacturers are benefiting less than expected from the yen's 30 percent drop, while even big exporters such as Toyota and Sony aren't sharing their recent spoils with workers as they might have 20 years ago. Banks are still too traumatized by the specter of deflation to lend.
The logjam is driving Abe to look for new areas in which to boost growth -- in particular the Japanese hinterlands. Tokyo has traditionally favored so-called regional economies with boondoggle public-works projects. These bring short-term gain to places such as Okinawa or Hokkaido, but only add to public debt. With the latter bill now topping $8.5 trillion, such largesse is no longer feasible. Instead, Abe hopes to spur competition between traditionally sleepy localities. Enterprising communities that create jobs will get state funding, while laggards are cut loose.
Kuroda could greatly aid this survival-of-the-fittest experiment. As analysts have urged, the BOJ should consider massive purchases of regional-government debt. The total amount of regional bonds outstanding may be roughly $1.7 trillion at the end of March; the BOJ should buy up as many of them as possible, while also forgiving the debt of the most financially troubled municipalities. That way, governments will squander less tax revenue on servicing debt and can issue more to invest and qualify for Abe's support program.
The BOJ also should consider buying up the nation's most distressed properties and egregious white-elephant projects. The area surrounding the idled Fukushima nuclear plant springs immediately to mind. So do dozens of barely utilized sports arenas built for the 2002 World Cup, the quiet "international" airports around the nation with only a handful of overseas flights (yes, you Ibaraki) and any number of cavernous museums and concert halls built to gin up growth in recent decades.
There's lots more the BOJ could do, including buying the "zaito bonds" state-run companies issue to fund projects, a range of asset-backed and mortgage-backed securities or even derivatives contracts (a possibility Kuroda has raised before). The central bank could buy stocks directly from banks and real estate and commodity funds. Loading up on foreign bonds would help extend the yen's declines and support exports. Also, as I've written before, the BOJ could offer cash -- or debit cards -- directly to households to make sure its liquidity gets traction.
The risks -- increasing moral hazard; inflating new bubbles; sowing the seeds of a financial crisis -- are obvious and plentiful. Yet the more the BOJ pledges to "do whatever it can" to end deflation without succeeding, the more likely it is that traders will pull the plug on bonds and stocks anyway, causing a run on the yen.
Bottom line, whatever the BOJ is doing now isn't working, as banks like Nomura are starting to acknowledge. Kuroda needs a better way to translate his $700 billion-plus of annual bond purchases into economic growth. Given how globalized Japan Inc. has become, maybe acting locally is the way to do it.
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