Review & Outlook

Japan’s Wizards of Ease

More QE can’t make up for fiscal and regulatory blunders.

Oct. 31, 2014 6:15 p.m. ET
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Haruhiko Kuroda, governor of the Bank of Japan, during a news conference on Japan's quantitative easing program in Tokyo on Friday. Bloomberg 


Give Japanese central banker Haruhiko Kuroda credit for showmanship. The Bank of Japan ’s (BOJ) move Friday to expand its quantitative easing program promptly sent the Tokyo stock market to a seven-year high, and the yen to a six-year low around ¥112 per dollar. But better not peek behind the curtain at this wizard of ease.

Mr. Kuroda felt it was necessary to rescue an economy that is still floundering despite previous bouts of QE. Economists expect growth of 0.2% for the current fiscal year. Inflation is slowing to around 1% excluding the effects of an April consumption-tax hike, short of the central bank’s 2% target. Household spending is down, and there are signs the job market is softening.

The BOJ’s solution is to purchase more Japanese government bonds, exchange-traded funds and real-estate investment trusts in an effort to expand the monetary base by ¥80 trillion per year, compared to its previous expansionary target of ¥60-70 trillion. It’s a brave attempt to conjure inflation out of Japan’s deflationary cauldron of abysmal government finances, unreformed labor markets, cosseted domestic industries and aging population.

Mr. Kuroda and Prime MInister Shinzo Abe are still incanting from the spell book promulgated by the International Monetary Fund. The recipe consists of Keynesian spending blowouts of the type Tokyo attempted for two decades at the expense of deteriorating government finances and growing debt; higher taxes to pay for that spending, such as the April value-added tax increase to 8% from 5%; and then monetary easing and currency devaluation to counter the damage to growth from the tax increases.

Japan’s opening round of QE in 2013 was arguably needed to break a long period of deflation. But now it has become a crutch to let Mr. Abe avoid following through on his long-promised “third arrow” of economic reform.

A free-trade agenda that was supposed to open Japan to more competition is stalled. Labor-market reforms that would increase flexibility in hiring and firing and encourage productivity gains are off the table, as is more immigration to counter the economic drag of a declining population. If this sounds like European leaders who browbeat the European Central Bank while never delivering reform, you’ve broken the code.

Monetary policy by itself can’t overcome bad fiscal and regulatory policy. Although currency depreciation gives exporters a boost to yen-denominated earnings, without economic reforms to spur greater investment and efficiency companies continue to lose global market share to competitors. At least foreign shareholders win big from the asset-price bubble that QE creates.

Investors may thus celebrate Mr. Kuroda’s latest conjuring trick, but soon enough they’ll demand another miracle. Expect the calls to grow especially loud if Mr. Abe pushes forward with the next scheduled increase in the consumption tax—to 10%—next year. The question is how much longer this can continue before Messrs. Abe and Kuroda run out of monetary tricks and investors notice the absence of economic growth behind the smoke on stage.

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