NIKKEI ASIAN REVIEW
After starting badly, 2019 promises to pile pressure on Kuroda
If you think Jerome Powell faces a difficult 2019 as chairman of the U.S. Federal Reserve, consider what awaits Haruhiko Kuroda at the Bank of Japan.
The New Year usually gets off to a slow start in Japan, where the nation’s 126 million people generally enjoy a few days’ downtime. Not this year. As Gov. Kuroda’s staff left the office in the last days of December, investors were already smarting from a 10% plunge in the Nikkei Stock Average, or Nikkei 225, in one month. As BOJ folks shuttled to and from hometowns around Japan, the yen surged — at one point by nearly 4% on Jan. 3 alone.
Opinion on China, Japan’s biggest export market, turned sharply negative in recent days. Wall Street is in turmoil. Sliding oil prices suggest cooling global demand. Ominous news all around for a Japanese economy that contracted 2.5% in the third quarter of 2018.
Welcome to what promises to be the BOJ’s unexpected year from hell. Unexpected because Kuroda’s team entered 2018 with economic winds at its back. Twelve months ago, speculation focused on an exit from history’s most audacious monetary experiment.
With Japan enjoying the longest recovery since the 1980s and wages forecast to rise, the time seemed ripe to reduce epic purchases of government debt, equities via exchange-traded funds and other assets. The BOJ’s balance sheet, after all, reached a dubious milestone in 2018, when it topped Japan’s $4.87 trillion of annual gross domestic product.
Now, the question no longer is about whether Kuroda’s team will pull out of monetary easing but do more to support a decelerating economy. And what can the BOJ actually do given the limited success of past largesse?
The immediate goal is capping the yen’s rally, which has spooked global markets. The yen jumps when investors suddenly turn risk-averse. Fund manager are drawn to Japan’s liquid markets and current-account surplus.
The central problem is that Japan’s economic growth relies largely a weak yen and its capacity to boost exports. Though Prime Minister Shinzo Abe talked grandly about structural reform, the yen’s 30% drop beginning in late 2012 was the fuel behind the 12-quarter run of growth Japan experienced until its July-September stumble.
Construction ahead of the 2020 Tokyo Olympics helped. But Abe bet (wrongly) that an export boom alone would prompt Japan Inc. to share profits with workers and invest. That faith led him to go slow on supply-side upgrades to an aging and unproductive economy model.
The gamble went awry as U.S. President Donald Trump’s trade war upended Asian supply chains. Trump’s assault on China, Asia’s key growth engine, scuttled hopes Toyota Motor and other corporate giants would boost salaries markedly. This standoff between Tokyo and business chieftains is a key reason why the BOJ is less than halfway to its target of raising inflation to 2% inflation.
Perhaps the most ominous signal for the BOJ for 2019 comes from Silicon Valley darling Apple Inc. It was CEO Tim Cook’s Jan. 2 warning about tepid iPhone sales that shifted yen-buying into high gear. Investors saw it as a red flag for companies including SoftBank, which last month stumbled selling shares in the IPO for its mobile unit. Japan Display, another demand bellwether and key Apple supplier, also lies in harm’s way. SoftBank Group shares fell nearly 3% on Friday, while Japan Display lost 2.7%.
Once the BOJ regains control of the yen, if it can, deliberations turn to safeguarding growth. At a minimum, BOJ tapering is off the table. The slightest whiff Kuroda might trim asset purchases would drive the yen to new heights, slamming GDP.
That would have Abe’s Liberal Democratic Party blaming the BOJ for a recession. It might even prompt lawmakers to gang up on Kuroda, putting him in the same dangerous corner as Fed Chairman Powell. Trump’s unseemly bashing of his hand-picked central banker contributed to market panic.
For Kuroda, this is a do-no-harm moment. Even if he is reluctant to grow the BOJ’s balance sheet further, he must leave open the option of another blast from his liquidity “bazooka.” Only that might warn speculators not to test Tokyo’s tolerance of a stronger yen. Kuroda must appear in lock-step with Finance Minister Taro Aso, to convince markets that Tokyo would sell yen if need be.
The BOJ could easily buy more government debt and ETFs. More success might come, though, through imaginatively diversifying asset purchases. It could load up on local government IOUs, freeing up cash to revitalize rural economies, or devise a scheme to buy debt from companies willing to boost wages.
Kuroda could create a special facility for banks, particularly regional ones, to tap cash to increase lending. Dwindling bank profits is an unfortunate side effect of Tokyo’s zero-interest-rate landscape.
Then there are the taboo options: buying distressed assets in rural areas like unused stadiums, hospitals and plots of land; formally monetizing government bonds; gorging on foreign debt; finding ways to inject cash directly into households still mired in the “deflationary mindset” Abenomics failed to alter. The key is to counter concerns the BOJ is out of ideas and ammunition.
The best option, of course, is for Abe to get busy loosening labor markets, rekindling Japan’s innovative spirit, catalyzing a startup boom, doing more to empower women, taxing companies hoarding excess cash and rethinking another planned sales tax increase this year.
But if Abe’s party didn’t do the heavy lifting during the growth years, it is unlikely it will find the courage as exports wane. What is more, Tokyo faces an erratic White House threatening 25% taxes on imports of cars and auto parts.
One bit of irony: Abe’s few reform successes will probably intensify deflationary pressures. They include free trade agreements and importing more foreign workers to offset labor shortages.
As 2019 begins, it is the yen bulls who are running through Japan, leaving the BOJ with a nightmare Kuroda & Co. probably never saw coming. It is a bad omen for the governor and his team.
William Pesek is an award-winning Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades.” He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia, for his work for the Nikkei Asian Review.
