Voodoo Banking Isn't the Answer
Desperate times, we’re told, demand desperate measures, and there may be no more desperate country anywhere in the world than Japan. Even as policymakers struggle to boost growth and inflation, post-Brexit turmoil has caused the yen to strengthen, slamming Japanese exporters. Bank of Japan Governor Haruhiko Kuroda is coming under more and more pressure to expand his already crazy-loose monetary policy. With few options available, he might be forced to push key interest rates even deeper into negative territory when the BOJ meets later this month.
Proponents of Kuroda’s negative-rate policy, introduced in January, contend that the strategy is transferring profits from big banks to needy households, lowering borrowing costs for companies, encouraging more risk-taking in investment and propping up real estate values. Kuroda in June proclaimed that negative rates were “having a positive impact on the real economy."
Yet there are already ample indications that negative rates are failing to achieve their main goals of spurring growth and inflation. And more broadly, the fact that central bankers have resorted to negative rates at all is a signal of just how narrow-minded and counterproductive the approach to restoring global growth has become.
Perhaps Japan’s negative-rate policy needs more time to work its magic. Maybe Japanese companies and consumers, knowing how desperate Kuroda is, are holding out for even lower borrowing costs in coming months. Yet Europe’s experience suggests otherwise. Even though the European Central Bank introduced negative rates two years ago, growth in the euro zone looked to be slowing even before Brexit. Inflation is barely expected to inch back into positive territory in June, at 0.1 percent.
It’s at least as likely that the entire strategy is flawed. The purpose of loose monetary policy is to stimulate economies by encouraging greater borrowing. That, however, assumes that investors see sound economic opportunities that make taking on debt worthwhile.
Apparently, not many Japanese feel that way. Even though borrowing costs and bond yields plunged after the introduction of negative rates, companies aren’t rushing to take advantage. In the first quarter, according to a recent report by Capital Economics, bank lending to Japan’s private sector grew at the slowest pace since 2014, while the amount of corporate bonds outstanding actually shrank.
The Japanese, after all, already have their fair share of debt. According to OECD data, private sector debt stood at 243 percent of GDP, while household debt was 132 percent of net disposable income in 2014. By comparison, the most recent ratios for the U.S. are respectively 198 percent and 114 percent. Japanese companies, too, already have quite a load of cash on hand if they want to invest. Moody’s figures the companies it rates held $255 billion of cash at the end of fiscal year 2014, up 15 percent from the previous year.
This same argument holds on a global scale. Debt has risen around the world since the 2008 financial crisis. In China, growth continues to slow even as the amount of new credit in the economy has increased. Heavily indebted companies, suffering in a slow-growth environment, need new loans simply to pay off old ones.
Meanwhile, policymakers are ignoring other tools to boost growth. Consumers could increase demand if their incomes and wages rose. Companies can be encouraged to invest and hire by using tools other than cheap credit. Yet policymakers have been slow to experiment with these superior options.
In Japan, for instance, the economy would be well-served by policies that improve the job stability and welfare of its army of contract workers; they generally get paid less than full-time staff, making it difficult for them to buy houses, start families and build careers. Prime Minister Shinzo Abe recently pitched a plan to force companies to pay these contract workers the same as full-time staff -- a step forward, but not enough to turn a distorted, dual-track labor market into a single, healthy one.
Or perhaps policymakers could do more to help these workers start their own companies and create more jobs. According to Ernst & Young, Japan witnessed a pathetic $800 million in venture-capital deals in 2015. The U.S. saw $72 billion. Even India had $8 billion.
In the U.S., growth would probably get a lift from closing the income gap. But steps that could help -- reforming a tax regime that unduly burdens wage-earners, for instance -- are simply not on the table. Any hope of improving the nation’s crumbling infrastructure, which would lift growth, create jobs and bring down the costs of doing business, has been dashed by political gridlock in Washington.
Relying on central banks is politically easier than attempting such structural reforms, of course. But increasingly desperate monetary experiments may be doing as much harm as good. For one thing, negative rates are hurting the very people who might help revive their economies. By effectively eradicating returns on fixed-income investments, Kuroda is punishing the many pensioners and middle-income families who want to see their savings grow without taking undue risks. Not only Japanese are being pummeled. Globally, the amount of sovereign debt with sub-zero yields reached $11.7 trillion in June, according to ratings agency Fitch.
The global economy won’t be restored to health with unorthodox central banking alone. Yes, desperate times warrant desperate measures -- just not the ones we’re getting.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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