As Abe­nomics stalls, the Bank of Ja­pan weighs its lim­ited op­tions

▶ Ja­pan’s econ­omy is weak­en­ing, so the BOJ may have to act again ▶ Abe has “no choice but to de­pend on Bank of Ja­pan pol­icy”

Bloomberg Businessweek (North America) - - News - �Bruce Ein­horn, with Isabel Reynolds and Keiko Ujikane

De­spite all Prime Min­is­ter Shinzo Abe has done, Ja­pan’s econ­omy con­tracted an an­nu­al­ized 1.4 per­cent in the fi­nal three months of 2015, the govern­ment an­nounced on Feb. 15. Con­sumer prices rose just 0.2 per­cent year to year, per­ilously close to de­fla­tion. Ja­panese con­sumers, hurt by tepid growth in wages and bonuses and a 3 per­cent­age point rise in the con­sump­tion tax in 2014, are hold­ing on to their wal­lets, with pri­vate con­sump­tion drop­ping 0.8 per­cent in the quar­ter.

The yen has gained 5.6 per­cent against the dol­lar since the start of the year, erod­ing prof­its for ex­porters such as Toy­ota Mo­tor and Pana­sonic. Th­ese com­pa­nies have ben­e­fited from the yen’s weak­ness since the prime min­is­ter came to of­fice in late 2012 and be­gan the pol­icy changes known as Abe­nomics.

“There’s no clear driver to sup­port Ja­pan’s econ­omy,” says Yuichi Ko­dama, chief econ­o­mist at Meiji Ya­suda Life In­sur­ance in Tokyo. Yet on the same day the govern­ment an­nounced the econ­omy’s con­trac­tion, the bench­mark Nikkei stock in­dex rose more than 7 per­cent. In­vestors hope that the weak data could spur Bank of Ja­pan Gov­er­nor Haruhiko Kuroda, who pushed through a neg­a­tive in­ter­est rate last month, to move even deeper into neg­a­tive ter­ri­tory, or pur­chase even more bonds. They also hope Abe will post­pone an­other hike in the con­sump­tion tax.

Hand­picked by Abe in 2013, Kuroda has ag­gres­sively im­ple­mented the mon­e­tary pol­icy en­vi­sioned by Abe­nomics. He has cham­pi­oned a quan­ti­ta­tive eas­ing pro­gram of bond and other as­set pur­chases by the cen­tral bank that has left the BOJ with a bal­ance sheet about three-quar­ters the size of Ja­pan’s $4.6 tril­lion econ­omy. Kuroda’s bold and un­con­ven­tional moves helped drive down the yen, con­tribut­ing to an in­crease in cor­po­rate earn­ings and stock prices.

In Jan­uary, the Bank of Ja­pan started charg­ing 0.1 per­cent on part of the cash de­posited at the cen­tral bank by big fi­nan­cial in­sti­tu­tions. The idea is to en­cour­age banks to lend in­stead of watch­ing their cash lose value. “Kuroda is do­ing ev­ery­thing he can,” says Mar­cel Thieliant, Ja­pan econ­o­mist for Cap­i­tal Eco­nom­ics.

Abe’s pro­gram has what he calls three “ar­rows”: an easy-money pol­icy, fis­cal stim­u­lus, and struc­tural re­forms. Al­though the BOJ has done its part in terms of in­ter­est rates and bond pur­chases, Abe­nomics has been a dis­ap­point­ment in the other two ar­eas. The govern­ment has moved slowly on re­forms of la­bor laws and other reg­u­la­tions. As for fis­cal stim­u­lus, Abe has in­creased spend­ing, but also raised the con­sump­tion tax to 8 per­cent. He wants to raise it to 10 per­cent.

“Abe and the govern­ment have no choice but to de­pend on Bank of Ja­pan pol­icy,” says Kazuhiko Ogata, chief econ­o­mist for Ja­pan at Crédit Agri­cole. But with the BOJ rate neg­a­tive, Kuroda has lit­tle room to ma­neu­ver. Gross do­mes­tic prod­uct growth for the fis­cal year end­ing in March will be just 0.8 per­cent, ac­cord­ing to Bloomberg In­tel­li­gence, lower than the cen­tral bank’s tar­get of 1.1 per­cent. Con­fi­dence in Abe­nomics is fall­ing. In a Yomi­uri poll pub­lished on Feb. 16, ap­proval of Abe’s eco­nomic poli­cies fell to a record low of 39 per­cent. Kuroda may be tempted to push neg­a­tive rates fur­ther. But com­mer­cial banks might then re­spond by charg­ing or­di­nary cus­tomers for their sav­ings ac­counts. De­pos­i­tors could get spooked and with­draw their money. If that were to hap­pen, “they wouldn’t have enough safes” to store all the cash, says Ogata. Crit­ics of Abe­nomics say it’s al­ready too late for Kuroda to save the day when ma­jor ex­port mar­kets such as China are cut­ting back on their pur­chases of goods made in Ja­pan and when wor­ried Ja­panese busi­nesses are hoard­ing cash. “I don’t think Abe­nomics can de­liver in this head­wind,” Takuji Okubo, chief econ­o­mist at Ja­pan Macro Ad­vi­sors, told Bloomberg TV on Feb. 15. There’s also a limit to what the cen­tral bank can achieve with­out struc­tural re­forms by Abe’s govern­ment, says David Car­bon, chief econ­o­mist for DBS Bank in Sin­ga­pore. “We’re at the end of the road for mon­e­tary pol­icy here,” he says. “It’s time that ev­ery­body rec­og­nizes that.”

The bot­tom line The most ef­fec­tive pol­icy of Abe­nomics is the eas­ing by the cen­tral bank, which is reach­ing the lim­its of what it can do.

Haruhiko Kuroda

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