Ja­pan's Cen­tral Bank is China's big­gest cheer­leader

The Pak Banker - - OPINION - Wil­liam Pe­sek

Bank of Ja­pan Gover­nor Haruhiko Kuroda has a new strat­egy to sup­port his coun­try's list­ing econ­omy: talk­ing up China's. It's a marked break with what other Ja­panese of­fi­cials are say­ing. Fi­nance Min­is­ter Taro Aso and econ­omy czar Akira Amari have been ea­ger to blame China's slow­down for Ja­pan's woes. It's some­what sur­real to see them urge Bei­jing to im­ple­ment eco­nomic re­forms when they've done noth­ing of the sort in Tokyo -- and with more time on the job than their Chi­nese coun­ter­parts.

Kuroda, how­ever, is guilty of tak­ing things to the op­po­site ex­treme. Speak­ing in New York, he chal­lenged the neg­a­tiv­ity shroud­ing Asia's big­gest econ­omy, say­ing he's "rea­son­ably sure" China will grow be­tween 6 per­cent and 7 per­cent this year and next -- a pre­dic­tion that hardly any­one else has en­dorsed. Kuroda has ef­fec­tively lashed his cred­i­bil­ity, and his legacy, to China's tra­jec­tory. It's not hard to un­der­stand why he might have felt he had no choice. Kuroda has to con­tend with three big prob­lems. The first is de­mo­graph­ics. Just as his pre­de­ces­sor Masaaki Shi­rakawa warned, Ja­pan's con­sumer prices are bound to fall as its pop­u­la­tion ages. The sec­ond is a dearth of con­fi­dence: Mon­e­tary pol­icy has been ren­dered co­matose by the public's hes­i­tance to bor­row and banks' hes­i­tance to lend. The third is China's slow­down -- a vari­able far be­yond Tokyo's con­trol, but no less crit­i­cal for Ja­pan's fate.

Prime Min­is­ter Shinzo Abe's re­vival pro- gram has three parts -- mon­e­tary stim­u­lus, fis­cal spend­ing and dereg­u­la­tion -- but China's boom has al­ways been the unof­fi­cial fourth. Un­til now, that is. China's out­look is de­te­rio- rat­ing faster than most in­vestors ex­pected, caus­ing an ex­is­ten­tial cri­sis for Abe­nomics.

The world needs to re­gain some per­spec­tive on China. As Ni­cholas Lardy of the Peter­son In­sti­tute wrote in the New York Times, the data on China's eco­nomic fun­da­men­tals -- growth in wages, non-agri­cul­ture job growth, dis­pos­able in­come and house­hold ex­pen­di­tures -- be­lie the on­go­ing melt­down hys­te­ria. Naysay­ers, Lardy says, are mak­ing the mis­take of in­ter­pret­ing China's data through the lens of its in­dus­trial sec­tor. Yes, China's elec­tric­ity rates are plum­met­ing. But that's only be­cause China is shift­ing to a ser­vices-based econ­omy that's less power in­ten­sive than steel pro­duc­tion or gar­ment man­u­fac­tur­ing.

The fact that China isn't crash­ing should put most of the world at ease. But even a mod­er­ate slow­down could prove a lethal blow for Ja­pan. China's com­bi­na­tion of de­fla­tion and cur­rency de­val­u­a­tion is re­duc­ing the odds that the tril­lions of dol­lars of mon­e­tary stim­u­lus Kuroda has pumped into mar­kets since April 2013 will ever gain any trac­tion. The yen's 22 per­cent drop since Kuroda un­leashed his quan­ti­ta­tiveeas­ing experiment pumped up prof­its at Toy­ota and Sony and fu­eled a rally in the Nikkei. It has failed, though, to en­cour­age ex­ec­u­tives to in­crease wages or in­vest in new busi­nesses.

Ar­gu­ments for another dose of QE must be weighed against the costs. Rather than make Ja­pan more re­silient and com­pet­i­tive, Tokyo's weak-yen pol­icy is in­creas­ing its de­pen­dence on ex­ports -- in other words, China -- at the very worst time. The $5 tril­lion dol­lars of wealth that Shang­hai-listed eq­ui­ties have erased since June is al­ready more than Ja­pan's an­nual out­put. The bet­ter so­lu­tion would be for Aso and Amari to stop belly­ach­ing and get to work. If they'd spent the last 975 days loos­en­ing la­bor mar­kets, build­ing a pro-growth tax sys­tem, en­cour­ag­ing in­no­va­tion and low­er­ing trade tar­iffs, they wouldn't be so shaken by a spell of bad eco­nomic news in Bei­jing or tum­bling stocks in Shang­hai.

It stands to rea­son Kuroda is do­ing -- and say­ing -- ev­ery­thing he can to pierce the neg­a­tiv­ity fog­ging China. Af­ter all, a sta­ble and vi­brant China would do more for Ja­pan than another QE jolt. Kuroda's happy talk about China goes hand-in-hand with his in­sis­tence, con­trary to all ev­i­dence, that Ja­pan is on pace to meet its 2 per­cent in­fla­tion tar­get, and BOJ of­fi­cials' ex­cuse-mak­ing about how weak oil prices are to blame for their pol­icy fail­ures. But these kinds of state­ments pose risks of their own; if they prove to be il­lu­sory, they will put a se­ri­ous dent in the BOJ's cred­i­bil­ity. The sim­ple fact is that un­less Ja­pan tends to its own prob­lems, it will in­evitably get dragged ever deeper into China's. And in that case, Ja­pan's lead­ers will have no one to blame but them­selves.

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