Is the Bank of Japan finished with stimulus? Governor Haruhiko Kuroda hinted as much when he spoke in parliament on Wednesday. Kuroda didn't explicitly say he's done with his unprecedented quantitative-easing programs. But he did say he doesn't envision a deeper drop in the yen's value.
An obvious statement, perhaps, given the yen's 31 percent devaluation since Prime Minister Shinzo Abe came to office in December 2012. But the currency world is one of winks and nods, so Kuroda's forthrightness demands some further explanation.
Some have suggested that Kuroda had gotten word that Japanese officials received an earful about the yen's plunge from their counterparts at this week's Group of Seven meeting in Germany. But allow me to suggest another theory: Kuroda may be signaling to Abe that it's his turn to revive the economy.
Until now, Kuroda has been remarkably deferential to his boss, even as Abe has seemingly lost interest in the pro-growth reforms he has promised to pursue. Abe's fiscal policy has been a dud thanks to an April 2014 sales tax increase that pushed the economy into recession. And deregulation hasn't materialized at all. Other than some modest steps to tighten corporate governance and bring more women into the workforce, Abe has done little.
Japan's revival program has been reduced to monetary policy. And Kuroda's multitrillion-dollar stimulus surge has had some positive effects since it began in April 2013. It has driven the Nikkei stock exchange up about 60 percent, and induced some Japanese companies to boost investment spending. In the first quarter, non-residential investment advanced the most in a year.
Unfortunately, those investments figures are still 27 percent lower than the peak reached in 1991. Meanwhile, the key yardstick of Abe’s push to make companies more profitable is heading the wrong way. The Topix index’s return on equity fell to 8.2 percent at the end of March from 8.6 percent a year earlier.
The solution for these problems would be for Abe to accelerate efforts to lower trade tariffs, alter tax policies in favor of small businesses and startups, and cut red tape. But Kuroda's historic largesse has so far allowed the government to maintain a glacial pace in implementing reforms. It's possible that Kuroda is now signaling those days are over.
And with the yen touching 125.86 on June 5, the weakest since June 2002, it's hard to disagree with Kuroda's assessment that the currency has fallen far enough. One thing we can say for certain: predictions for the yen to hit 130 to the dollar, or even 150, won't come to pass.
If this is Kuroda's Paul Volcker moment, in which he emulates the Federal Reserve chairman who demanded Washington do its part to heal the U.S. economy in the 1980s, then Abenomics could be in for a second wind. And, with deflation on Japan's horizon, it wouldn't be a moment too soon.
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