BoJ's Kuroda, Monetary Kamikaze Without a Pause

Kuroda-san administers smelling salts to Japan's economy & asks it how many fingers he's holding up.

I have long been fascinated with the apparent disconnect between the typical Japanese comportment of apologetic politeness and their occasional bouts of banzai, devil-may-care excesses when they throw caution to the wind. Current Bank of Japan Governor Haruhiko Kuroda is a case in point. A few months ago I prepared an Asia-focused contribution to IPE stalwart Thomas Oatley and Kindred Winecoff's new edited work on international monetary relations where I discussed Kuroda's influential role in steering the Manila-based Asian Development Bank (ADB) where he was its president until being recalled by the current Liberal Democratic Party (LDP) leadership. He best embodies the duality I'm talking about: he looks like the dignified and mild-mannered career civil servant that he is, but he is also responsible for throwing the world economy off-balance by announcing even more quantitative easing to hopefully pull Japan out of its deflationary slump that's now well into its third decade.

If I were to pick a metaphor, it's the last-chance saloon for Japan monetary-wise. Having run out of bullets shooting at the deflation beast, Kuroda has now flung the revolver at it. Or, for a Japanese rather than a Western analogy, Kuroda has instructed that the cockpit of his Mitsubishi A6M Zero be welded shut as he flies his aircraft straight into the deflation beast. His career as a civil servant is at and end; the only real question is if he can slay deflation. Prior to catching world markets off-guard last week, he reiterated his commitment to staying the course despite some unwelcome economic performances:

The BoJ has been criticised lately — even by [PM Shinzo] Abe — for a possibly excessive yen depreciation. But Kuroda insisted that “yen depreciation so far has been broadly in line with fundamentals and financial conditions. And that will be beneficial to the economy.”

Japan’s export volume had been “rather flat”, Kuroda admitted, but he attributed this in part to weak external demand, especially in East Asia, where more than 50% of Japanese exports go. Much Japanese manufacturing production has also moved offshore, limiting the benefit of a cheaper yen. But the weaker currency had still helped Japan, Kuroda insisted, by raising profitability in yen terms, whether from exports or from profits remitted from overseas production.

Kuroda has been pressured to extend the March 2015 deadline for achieving his inflation target. But Kuroda made it clear he intends to stay on track. “We are still half way there —around 1.25%,” he said. “Our target is 2%, so we will continue our quantitative and qualitative easing until we achieve the target.”

Which brings us to Kuroda's kamikaze attack on deflation. The extent of money printing is humongous to be honest, and unprecedented even by the American experience:

According to an analysis in the November 3 Nihon Keizai Shimbun, when Kuroda achieves his target the BoJ balance sheet will have exploded–and liquidity forced into Japan’s (and the global economy)–to a level of over 70% of Japan’s GDP (up from 30% when Kuroda assumed his position), compared with a level of some 25% of U.S. GDP which the Fed has pledged not to exceed for the foreseeable future.  The GDP/monetary base level for the European central bank is something over 10%.

If buying every single yen's worth of Japanese government bond (JGB) issued from this day onward is what it takes, Kuroda says he will do it:

Bank of Japan chief Haruhiko Kuroda highlighted his determination to stoke inflation in the world’s third-biggest economy, saying there’s no limit to measures he could take to reach its price target.

It’s natural to act if risks to price gains become substantial, and last week’s stimulus was “a true display of the Bank’s unwavering commitment,” Kuroda said in a speech in Tokyo today. “As for measures for additional easing, I don’t think there is a limit, including on bond purchases.”

Convincing consumers and companies that he means business is critical to the central bank’s efforts to end what it calls a “deflationary mindset” in Japan. The BOJ last week surprised markets with an expansion in already-unprecedented asset-purchase program that sees it ready to buy every new bond issued by the government. 

Once more, I simply believe that the "problem" with Japan is not even in the first instance a monetary condition. For one thing, the natural tendency with a nation in the advanced stages of depopulation is for the people to hold off consumption. There is simply not enough people out there to buy all the stuff being made. Besides, people keep saving for a rainy day since they rationally expect that few young people will be around to pay into the pension system in their old age. The depopulation-deflation cycle is a vicious one, but again, it cannot be solved by purely monetary means.

The only feasible solution--the one they haven't tried yet and Japanese leaders don't address in a substantial way since it's politically contentious--remains welcoming migration in large numbers in the absence of interest among the natives in reproduction. Helicopter dropping has already runs its course, and more of the same doesn't appear to be helping at all.