Runoff economy fails stagflationary Japan


If time travel were possible for Japanese officials, it would be very tempting to return to the Tokyo of March 2013 and avoid the last nine years of economic madness.

The moment in question was when Haruhiko Kuroda was appointed head of the Bank of Japan. The hiring, made by then-Prime Minister Shinzo Abe, was wise. Kuroda was well known from his stint from 1999 to 2003 as the Ministry of Finance’s liaison man for international affairs. The eight years he spent in Manila leading the Asian Development Bank and fighting poverty from 2005 to 2013 only enhanced Kuroda’s skills.

Yet Kuroda was always designed to fail. Abe and his followers didn’t know it in 2013, but the strategy they imposed on Governor Kuroda – weaken the yen and fast – left the BOJ with an option. And it flooded the world markets with yen.

At the time, people thought Abe was a bold and clever reformer. The buzz was that deflation-ridden Japan was about to suffer a supply-side shock, portraying Abe as an amalgamation of Ronald Reagan and Margaret Thatcher. Instead, Abe took Tokyo towards Argentina or Vietnam.

Currency devaluation has long been the ruling Liberal Democratic Party’s go-to move to optimize gross domestic product. Abe hired Kuroda to speed up the process – and he did.

Along with hoarding huge blocks of debt and government stocks, Kuroda launched massive “bazooka” blasts of liquidity in the markets. In a short time, the yen fell 30%, economic growth returned, and corporate profits hit record highs.

It lacked, however, the virtuous circle that Abe’s inner circle envisioned. CEOs sat on cash rather than sharing it with workers or investing big in new growth-boosting industries. The problem, of course, was that Japanese leaders had forgotten that the 1980s were over. The industrial system that Abe’s trickle-down economy was meant to revive no longer exists. Not when Japan’s domestic service sector is at least as important as the engine of exports.

Even Kuroda realizes that the obsession with the weak yen has made things worse for Asia’s second largest economy. The immediate fallout is soaring costs of energy and other raw materials that Japan has to import. Japan may soon experience the 2% inflation that Kuroda was hired to produce, but it’s the “bad” guy that’s undermining household and business confidence. This is how “stagflation” happens.

As Kuroda put it in December: “The depreciation of the yen could have an increasing negative impact on household incomes through higher prices”. He added that “quantitative analysis by bank staff shows that the effects of yen depreciation in terms of higher durable goods prices have increased in recent years.”

The “depreciation of the yen,” Kuroda concluded, “is essentially having a positive net impact on the Japanese economy. That said, the fall of the yen has both positive and negative effects, and one should be mindful that its effects will materialize in various ways. »

Fair enough. But the bigger issue is missing from this BOJ autopsy: how a weak yen dampened the urgency for Tokyo to make the economy more competitive and agile and for business leaders to innovate, restructure and to take risks.

In 2018, the BOJ’s balance sheet exceeded $5 trillion in Japan’s annual gross domestic product. A weaker yen, the main motivator for this balance sheet frenzy, has been the biggest corporate welfare program in modern history. This helps explain why Japan Inc. is losing competitiveness. And why, while India and Indonesia are churning out a growing number of unicorn tech startups, Japan is largely watching from the sidelines.

When Argentina, Vietnam or other upstarts devalue exchange rates, the goal is to shake up the system – the political equivalent of a heart defibrillator. When a developed Group of Seven power like Japan does, it acts more like a sedative over time that dampens the animal spirits of an economy. It simply removed much of the CEOs’ resolve to remind Apple, Tesla and Samsung of Japan Inc.’s storied past as a global center of innovation. Why take risks when the central bank always supports you?

If time travel was a thing, Kuroda would return in March 2013 and try a very different approach. Dare to dream, because now the weak yen policy takes on new life. The yen, as economist Udith Sikand of Gavekal Research observes, is down another 5.5% in the month since Russia invaded Ukraine.

“With the 24% rise in oil prices in US dollars since February 24, thus equating to a 31% rise in the price of oil in yen, some Japanese policymakers are beginning to suggest that much more yen weakness – and the imported inflation it brings – may soon become too much of a good thing,” says Sikand.

The good news is that current Prime Minister Fumio Kishida is telegraphing plans for a “new form of capitalism” just as the old ones are failing in Japan. The bad news is that from slowing domestic growth to Covid-19 to Ukraine, Japanese leaders may now be focused enough on reform.

The past nine years of lost time have been a vital window of opportunity that Tokyo cannot recover. This explains everything about why the Japanese economy still exudes a time-locking quality that won’t do it much favor in the Chinese era.


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