NIKKEI ASIAN REVIEW
Kuroda must talk to Abe and Japan Inc., not the financial market
January 25, 2018
Haruhiko Kuroda has a communications problem on his hands. It is not the words the Bank of Japan governor is using, though. It is who he is talking to.
The BOJ stayed the course on Jan. 23 with the ultra-loose policies Gov. Kuroda rolled out in March 2013, leaving its price and economic forecasts unchanged. That, in itself, is quite the linguistic balancing act: Exuding confidence deflation has been defeated without fueling speculation Japan will soon normalize interest rates. Any move by markets to bid up bond yields in preparation for better economic times could stymie Kuroda’s stimulus efforts.
Yet Kuroda needs to start talking less to markets and consumers and more to those delaying the return of normal pricing dynamics: Prime Minister Shinzo Abe and corporate giants.
The Abe conversation should go like this: Look, Mr. Prime Minister, we at the BOJ have done our bit, and then some. Along with buying more than $720 billion of Japanese government bonds annually, we pushed our tentacles into asset-backed and real-estate arenas, effectively cornered secondary trading in debt markets and taken unprecedented stakes in exchange-traded funds. As of the end of October, the BOJ owned 74% of the ETF market, up from 65% in 2016. And yet consumer prices are perhaps halfway to our 2% goal.
Our policies, Kuroda must explain, were always meant to set the stage for the shock therapy Abenomics promised to unleash on a rigid, risk-averse and complacent industrial sector. Aside from a few modest corporate-governance tweaks, we have seen scant progress on increasing productivity, internationalizing labor markets, catalyzing a startup boom, altering a dangerous demographic trajectory or attacking the groupthink deadening Japan’s animal spirits. That, Abe-san, is why banks are not lending the yen we create — and executives and households are not borrowing. All involved lack confidence that, five years from now, Japan will be a far more vibrant place.
Turns out, Masaaki Shirakawa was right. Before my BOJ predecessor left the building in March 2013, Kuroda must remind Abe, he warned that quantitative easing and a weaker yen will not restore Japan to its 1980s greatness — only bold structural upgrades could do that. The moment the current recovery in global demand falters, so might Japanese growth, and everyone knows it.
Kuroda’s next conversation is directly with the executives his policies have yet to impress. Look Japan Inc., Kuroda should say, it is time we considered the cart-and-horse problem at hand. Abenomics bequeathed you chieftains massive spoils. You are sitting on more than $2 trillion of idle cash reserves that could fatten employee paychecks and kick off a virtuous cycle of rising consumption and, in turn, greater demand for your wares. It is what economists call a clear win-win.
Corporate Japan is sure to push back, claiming Abe’s pledge for a supply-side revolution took a backseat to revising the wartime constitution. And here, they have a point. Abenomics has been more marketing campaigning than reform scheme — more bait-and-switch than a credible plan to revive sustainable domestic demand-led growth. It has been 95 days, after all, since Abe won another election mandate to, as he claimed, accelerate reforms. Lots of focus on legislation to enable Japan to field a conventional military force and cozying up to Donald Trump’s White House. Little on harnessing today’s growth to retool an uncompetitive economy.
Abenomics has mostly been Kurodanomics, and that must change. In speeches and interviews, Kuroda’s team should urge executives to consider leading for a change. Yes, Japan has for decades been a top-down economy with chieftains waiting for direction from the Ministry of Finance and Cabinet Office. Why not prod Japan Inc. to juice national consumption via wage hikes and bonuses? Rather than wait for prescriptions from bureaucrats, executives should forge ahead with moves to scrap innovation-killing seniority-based promotions, antiquated takeover defenses, male-dominated management structures and a national obsession with weak exchange rates.
There are many things Kuroda cannot control, least of which whether he gets a second term as BOJ head come April. Though there is little doubt Abe will stick with his easy-money man, he is being coy about making it official. Perhaps Abe hopes to extract a quid pro quo: continued monetary support in exchange for another five years at the helm.
It is an open question, meantime, if Kuroda can keep at bay the so-called bond vigilantes betting that BOJ “tapering” is imminent and bidding up yields. Regional banks are clamoring for higher long-term bond yields amid tightening margins. The problem, though, is financial stability. If yields go up, prices go down, and with them the value of the main financial asset held by giant banks, insurance companies, the postal system, pensions, endowments, universities and the fast-growing ranks of Japan’s retirees. The damage from any turmoil in Japan’s $10 trillion-plus would run far and wide. Predictions of markedly tighter BOJ policies are overdone.
As Kuroda admitted Tuesday, “inflation excluding energy costs is barely above zero percent in Japan.” His bottom line was “there is still some distance to 2 percent inflation, so we are in no condition yet to debate the timing of an exit from ultra-easy monetary policy.”
That debate could be even further away than Kuroda suggests. The yen would skyrocket following any step away from aggressive quantitative easing. That would pose political problems with the Liberal Democratic Party’s business base and giant exporters — and make for some testy phone calls for Kuroda’s team. Kuroda, assuming he is still at the helm, is likely to prioritize yield-curve control over wholesale changes to BOJ policies that are the linchpin of Abenomics.
But such concerns are more about side effects than the forces holding Japan back. The bigger picture is that Kuroda’s efforts to communicate that better days lie ahead are falling flat. It is high time the BOJ tried a new tack with its lobbying efforts. No one in Tokyo has more gravitas to speaking truth to those with the most power to revive Japan. Kuroda has a huge microphone at his disposal. If only he would use it.
William Pesek is a Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades.” He has written for Bloomberg and Barron’s.