As Bank of Japan Governor Haruhiko Kuroda fails to get much traction in his bid to revitalize his country's economy, he should spare a thought for the man who warned him this would happen: his predecessor.
Masaaki Shirakawa has been the anti-Alan Greenspan since leaving the BOJ in March 2013. Where the former Federal Reserve governor pops up all over TV screens to defend his legacy, Shirakawa rarely speaks. Even when his nearly five-year term has been maligned by the government of Prime Minister Shinzo Abe for being too timid in fighting deflation, he has stayed remarkably silent.
When he was still in office, Shirakawa always claimed the causes of Japan's deflation were a rigid economy and bad demographics, not a lack of money supply. Kuroda has yet to concede the point explicitly, but his bank's actions essentially do. The slew of cheerleading reports BOJ officials have started issuing are a tacit admission that Kuroda's efforts at monetary stimulus have failed. The bank has even changed its methodology for measuring inflation so the data fit the BOJ's preferred narrative.
To be sure, sustained inflation would give Prime Minister Shinzo Abe major bragging rights, and vindicate his decision to axe Shirakawa and take a more aggressive tack to end Japan's lost-decade ordeal. But tweaking data isn't the way to do it.
India's credibility is still taking hits from its abrupt recalculation of the country's 2014 gross domestic product, from 4.7 percent to 6.9 percent. At the time, Morgan Stanley's Ruchir Sharma fumed that officials were "smashing India’s credibility and making its statistics bureau a laughing stock in global financial circles." The stakes are even higher when the world's third-biggest economy resorts to this kind of creative data crunching.
In a new research paper, BOJ officials led by Koichiro Kamada argue that "the price stability target and the quantitative and qualitative monetary easing, introduced by the Bank in 2013, contributed to strengthening the anchor of inflation expectations." Too bad the neither data nor bond rates jibe with that view. Yields on 10-year government debt are currently around 0.43 percent, lower than 0.54 percent 12 months ago. If anything, the inverse of what the BOJ is arguing is true.
Meanwhile, the BOJ's lobbying efforts to tweak official statistics are starting to fall flat. The bank's economists tried to get government statisticians to take greater account of the deteriorating quality of rented housing over time, which they say would allow the consumer price index to better capture the cost of living; it would also give investors the sense that inflation is rising faster toward its 2 percent target. But Sei Ueda, director of government price data, says the statistics bureau is confident it already accurately measures housing costs.
The truth is, Kuroda's team has gotten as far as it can with its two huge monetary infusions since April 2013. In addition to buying about $700 billion of government debt annually, the BOJ is also pumping money into everything from asset-backed securities to exchange-traded funds. The results can be seen in the 56 percent rally in the Nikkei, but not in the areas needed to generate a sustainable recovery like sizeable wages gain or capital investments by huge companies. In other words, everything has gone just as Kuroda's predecessor Shirakawa predicted.
That has the BOJ resorting to cheerleading. Kuroda's team continues to churn out report after report insisting reflation efforts are working. The common theme (including last week's report by Kamada) is that the BOJ's moves are lifting trend inflation, stimulating the economy and loosening financial conditions. Yet the International Monetary Fund seems to have missed the memo. It just downgraded its forecast for Japanese growth this year to a 0.8 percent from a prediction of 1 percent in April.
If Kuroda wants to motivate any audience it should be Abe's cabinet. As BOJ governors past warned, ending deflation requires much more than printing yen -- or moving the data goalposts. Aside the devaluation of the yen and modest efforts to improve corporate governance, the government has done little to remake the economy. Plans to encourage startups, loosen labor markets, cut red tape and better utilize the female workforce remain largely on the drawing board. Kuroda's monetary bonanza was meant to pave the way for structural shock-therapy that has yet to materialize. Kuroda should know that applauding the government's failures won't do much to restore his credibility.
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