The Bank of Japan
When easing gets hard
As monetary policy hits the buffers, policymakers blame big companies
HARUHIKO KURODA added another instance to his record of wrong-footing financial markets this week. Confronted with a rising yen and tumbling inflation, the thinking went, the central-bank governor had little choice but to shore up the credibility of the Bank of Japan (BoJ) with even looser monetary policy. But in the end the BoJ kept its stance unchanged. Markets reacted swiftly after the decision on April 28th: the yen jumped and the Nikkei 225 stockmarket index slumped.
Since introducing an interest rate of -0.1% on excess bank reserves in late January, Mr Kuroda has been hauled before parliament no fewer than 32 times to explain himself. Perhaps that has left him gun shy. Or perhaps the BoJ’s inaction is a hint to Shinzo Abe, the prime minister, that monetary policy should bear less of the burden of dragging Japan’s economy out of the slough of low inflation and growth.
Many economists reckon, nonetheless, that the BoJ will have little choice but to ease again soon. Mr Abe’s policies have failed to produce much growth or inflation, partly due to a falling oil price and China’s slowdown. GDP contracted by an annualised 1.1% in the last quarter of 2015 and is expected to continue fluctuating around zero in the first half of 2016.
Some hopeful data emerged before the BoJ’s monetary-policy meeting, notably that industrial production rose month on month in March by 3.6%, the biggest leap in nearly five years. But growth in the second quarter will probably suffer from recent earthquakes in Kumamoto prefecture, which disrupted industrial supply chains.
Worse, Japan is once again mired in deflation. Core CPI, which excludes fresh food, fell by 0.3% in March year on year, the biggest drop since the BoJ launched its programme of easing three years ago. Meanwhile the BoJ’s preferred measure, which strips out fresh food and energy, rose by 1.1%. Yet the drops in the headline measures have dented households’ and firms’ expectations of inflation. The BoJ once again cut its forecasts for growth and price rises.
What especially worries policymakers is that the yen has risen by nearly a tenth against the dollar since late January, reversing a long decline as the BoJ embraced quantitative easing (see chart). If anything, Japan’s trade and current-account surplus signal further currency strength over the rest of the year, reinforced by the Federal Reserve’s failure to signal another imminent rate rise at its meeting this week.
All in all, the power of the BoJ to overcome structural imbalances in Japan’s economy seems to be diminishing. Large firms have continued to add to their hoards of cash. They now hold close to ¥250 trillion ($2.2 trillion) in cash, a massive 50% of GDP. Capital investment by firms is 7% below its level eight years ago and the gap between corporate cashflow and investment is at record levels, notes Richard Katz of the Oriental Economist, a newsletter.
Nor have firms raised wages much in spite of a tight job market. Pay rises in the order of 5-10% this year are required to boost household consumption, economists argue. Instead, workers at large firms are on track to receive a lower pay rise—an average hike in overall base pay and seniority-related pay of 2.19%—than they did in the previous two years.
Many in the government feel let down by the corporate sector, says an official. Mr Abe has improved the environment for big business with (until recently) a sharply lower yen and reduced corporate-tax rates. But big firms argue, in circular fashion, that their spending is inhibited by Japan’s uncertain growth prospects.
Mr Abe is now likely to use fiscal policy to try and sustain some level of growth. In May he is expected to postpone a rise in Japan’s consumption tax from 8% to 10%, which is scheduled for April 2017. A large supplementary budget package is in the works. But all that will add to worries about the size of Japan’s national debt, which is more than 240% of GDP.
Some economists believe that the BoJ will become the first big central bank to resort to “helicopter money”—printing money to fund government spending or to give people cash.
Some argue the bank is already deploying something close to ’copter cash by sucking up so many government bonds. But it does not buy them directly, and Mr Kuroda recently said he would not countenance outright helicopter money. It was not long ago, of course, that he categorically ruled out negative rates.