Face­book needs a dis­like but­ton for Abe's ideas

The Pak Banker - - Front Page - Wil­liam Pe­sek

FOR Shinzo Abe, it isn't enough to see Sony Corp. and Pana­sonic Corp., two icons of in­dus­trial Ja­pan, re­duced to junk-debt sta­tus. The man who prob­a­bly will be­come prime min­is­ter next month might do the same for the yen. That is the up­shot of his de­sire to brow­beat the Bank of Ja­pan into un­lim­ited eas­ing. Granted, his Lib­eral Demo­cratic Party did that for most of the half-cen­tury it was in power un­til 2009. But Abe's de­signs on the BOJ smack of a mon­e­tary ji­had that would do more harm than good.

Polls sug­gest Abe will get a sec­ond crack at run­ning Ja­pan af­ter a Dec. 16 elec­tion. His first one, from 2006 to 2007, was an ex­er­cise in medi­ocrity and fo­cused on ed­u­ca­tion and mil­i­tary mat­ters. Round two will home in on end­ing de­fla­tion. To Abe, that means open­ing the mon­e­tary spigot in­def­i­nitely.

Abe may well rev­o­lu­tion­ize the cen­tral bank, though in un­help­ful ways. He would get to pick the BOJ's top three jobs, in­clud­ing re­plac­ing Masaaki Shi­rakawa with a more com­pli­ant gov­er­nor. Yet Abe, in a se­ries of com­ments, stepped way over the line of ig­no­rance and veered into fi­nan­cial ir­re­spon­si­bil­ity. Maybe the BOJ could do more. It might, for in­stance, pay greater at­ten­tion to how the strong yen is gut­ting Ja­panese com­pa­nies such as Sony and Pana­sonic, which Fitch Rat­ings Ltd. low­ered to spec­u­la­tive grade on Nov. 22.

Abe's in­ter­est in cre­at­ing in­fla­tion ig­nores the dilemma hov­er­ing over Ja­pan: the largest pub­lic debt in the in­dus­tri­al­ized world. Let's say Abe gets his wish and the BOJ achieves 3 per­cent in­fla­tion in short or­der. That would drive up the ul­tra-low bor­row­ing costs on which Ja­pan de­pends. Sub-1 per­cent bond yields are the glue hold­ing to­gether a rick­ety fi­nan­cial sys­tem. A jump in yields could dev­as­tate the econ­omy and trash the yen.

That would end badly for a na­tion with a rapidly ag­ing pop­u­la­tion, wan­ing com­pet­i­tive­ness amid China's as­cent and risk- averse pub­lic and cor­po­rate sec­tors. A chaotic plunge in the yen is in no one's in­ter­est, least of all a government that needs to im­port more oil to off­set the nu­clear re­ac­tors that were taken off­line af­ter last year's enor­mous earth­quake.

The BOJ's global clout is al­ready in doubt. When it in­ter­venes in cur­rency mar­kets or adds new stim­u­lus, traders yawn. Mak­ing the BOJ a more for­mal crea­ture of politi­cians, turn­ing it into a Peo­ple's Bank of China, isn't the an­swer.

Abe is backpedal­ing a bit. His call for the BOJ to buy con­struc­tion bonds to sup­port government spend­ing ran afoul of many Ja­pan watch­ers. Abe took to Face­book to clar­ify, a rare step for a Ja­panese politi­cian and one that has many econ­o­mists click­ing the "like" but­ton to fol­low his mon­e­tary mus­ings.

Not that they nec­es­sar­ily ac­tu­ally agree with what he is propos­ing. One of the more pointed re­but­tals came from former Fi­nance Min­is­ter Hiro­hisa Fu­jii. At 80, Fu­jii is one the few pol­icy mak­ers who re­calls grow­ing up amid the in­san­ity and dev­as­ta­tion of World War II.

"The cen­tral bank un­der­wrote the government's war ma­chine, al­low­ing the government to fight fool­ish wars," he said last week. Of Abe's de­sire to al­ter the BOJ's char­ter, Fu­jii added, "Re­vis­ing the BOJ law would mean a re­vival of the 1942 leg­is­la­tion." The law made the BOJ an in­stru­ment of government, a re­la­tion­ship that wasn't really ended un­til 1997.

Scary stuff. It makes claims that Fed­eral Re­serve Chair­man Ben S. Ber­nanke has gone too far look quaint. Hard-money en­thu­si­asts, such as Texas Con­gress­man Ron Paul, would be aghast at what Abe has in mind for the mon­e­tary author­ity that backs one of the three main in­ter­na­tional cur­ren­cies. Com­pared with Abe's ex­pec­ta­tions for his cen­tral bank, Ber­nanke looks al­most hawk­ish.

Has it not oc­curred to Abe and the LDP that mon­e­tary stim­u­lus alone won't re­vi­tal­ize Ja­pan? There seems to be lit­tle recog­ni­tion that de­fla­tion is a symp­tom of Ja­pan's two-decade- long eco­nomic drought, not its cause. Far more good would come from tak­ing a fresh look at fis­cal and tax poli­cies. End­ing Ja­pan's bal­ance-sheet re­ces­sion re­quires new strate­gies to in­crease de­mand from all di­rec­tions.

The year ahead prom­ises to be an­other rough one for the world econ­omy -- no end in sight to Europe's cri­sis, Amer­ica's re­cov­ery pro­ceed­ing slowly and China strug­gling to sup­port growth. As 2013 un­folds, econ­o­mists will won­der what Prime Min­is­ter Yoshi­hiko Noda was think­ing when he raised con­sump­tion taxes in such a shaky en­vi­ron­ment. Why not put Ja­pan's next fi­nance min­is­ter and BOJ chief in a room to­gether and de­mand a new course? Ja­pan's debt al­ready equals more than twice the size of the econ­omy, and the days of try­ing to gen­er­ate growth with huge publicworks projects are over.

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