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Opinion

Peter Pan remains a dangerous delusion for the Bank of Japan

Kuroda risks clinging too long to optimistic dreams and delaying urgent action

Of all the challenges facing the Bank of Japan in 2019, Peter Pan may present the trickiest.

It is not hard to find economists who fear BOJ Governor Haruhiko Kuroda has been living for years in Neverland, like the storybook boy who never grew up.

Some think he has not gone far enough to alter the "deflationary mindset." Others complain excessive easing smothered the animal spirits Japan needs to thrive. Either way he appears detached from reality.

It was Kuroda himself who raised Peter Pan when explaining the confidence game the BOJ is attempting. In a June 2015 speech, he explained that vibrant growth could be restored with ultra-low-cost money as long as the masses believe in its magic.

He then said: "I trust that many of you are familiar with the story of Peter Pan, in which it says, 'the moment you doubt whether you can fly, you cease forever to be able to do it.'"

Four years on, that strategy is not flying. Inflation is less than halfway to the 2% target. Nor have wages risen enough to create the virtuous cycle Kuroda and Prime Minister Shinzo Abe imagined.

Kuroda still seems in fairy-tale mode even as a global trade war jolts Tokyo back to reality. And a harsh one as U.S. President Donald Trump's tariffs send economies from Japan and Germany to Australia hurtling back to earth.

Kuroda was in Peter Pan mode right from the start. In April 2013, he echoed Mario Draghi with pledges to do "whatever it takes" to secure a happy reflationary ending. Yet last week, as the European Central Bank President renewed his willingness to act boldly, Kuroda's BOJ seemed in suspended animation.

On June 20, the BOJ left its -0.1% interest rate target unchanged. But its confidence in Japan's trajectory sounded pure fairy-tale. While the ECB and U.S. Federal Reserve telegraphed imminent easing moves, the BOJ essentially wished upon a star and took no action.

Kuroda's BOJ seems in suspended animation.   © Reuters

The point here is not to seem flippant. Kuroda was certainly sincere in 2015 when he referenced J.M. Barrie's timeless character. It is not clear, though, that Kuroda's team is now fully appreciating the risks of headwinds zooming Tokyo's way.

Of course, Kuroda's caution is partly a product of the villain in this economic tale: a White House determined to up end Asia's supply chains. The best defense of the BOJ's no-action decision is that it was not really about the economy. It was about the @realDonaldTrump Twitter feed.

Draghi can explain why. On June 18, he drew Trump's ire by saying he was ready to ease forcefully to boost growth. The euro promptly dropped versus the U.S. dollar, prompting Trump to tweet that Draghi was "making it unfairly easier" for Europe "to compete against the USA. They have been getting away with this for years, along with China and others."

Tokyo's immediate goal is not being lumped among those "others."

Trump is actually less angry than jealous. He is so desperate for his own interest rate cut that he is mulling ways to fire U.S. Federal Reserve Chairman Jerome Powell. BOJ officials can be excused for not wanting to provoke angry Trump tweets just ahead of U.S.-Japan trade talks.

But Kuroda is delaying the inevitable. The BOJ will be pumping more yen into the economy soon enough. Intensifying headwinds from Washington, and threats of more, may bring a decline in Japanese gross domestic product in the current quarter.

Understandable though it might be, Kuroda's patience could backfire. The BOJ risks looking asleep at the controls. Worse, Kuroda's insistence that Japan is enjoying a "virtuous cycle from income to spending" smacks of fantasy. It sends the wrong signal to Abe who should be acting boldly to ready the economy for the worst.

Trump's White House, after all, is becoming more volatile by the week. When he is not girding for war with Iran, he is blundering toward a currency clash with China and potentially Europe to complement his tariff arms race.

Markets take comfort in Trump's scheduled meeting with China's Xi Jinping in Osaka this week. But Trump's scandal-plagued administration is on the warpath, both on trade and military matters. The Chinese Communist Party is on its hind legs as U.S. duties on $200 billion of Chinese goods a year slam growth while millions of Hong Kongers challenge President Xi's dominion.

Not the best ingredients for a bilateral trade deal. Nor is Trump's sudden Twitter obsession with Draghi comforting. A concerted effort to weaken the dollar versus the euro would push markets back into a "risk-off" crouch. That means a stronger yen as investors rush for safe havens.

A yen surge would push Kurodanomics toward failure. Kuroda's epic easing helped generate the second-longest expansion since World War II. But the trade brawl exposed the strategy's limits. Neither ultralow borrowing costs nor negative bond yields have been enough to produce a durable growth.

Missing is the deregulatory big bang Abe previewed when he returned to power in 2012. Some modest successes tweaking corporate governance and attracting foreign talent, but nothing to give CEOs confidence to give workers the first hefty pay increases in decades.

Urgency also is missing. Not only does Kuroda's policy mix look stale, but his chirpy language is encouraging complacency in Abe's government.

Economist Yoshimasa Maruyama of SMBC Nikko Securities speaks for many when he warns the BOJ is too optimistic. He says Kuroda's team "is likely to be forced" to ease again as soon as September.

Team Kuroda is looking at four options: driving the benchmark rate further into negative territory; engineering lower 10-year yields; expanding the monetary base; or targeting asset prices.

The BOJ should do all four to regain the momentum. Just as important, drop the happy talk. It gives the government cover to delay badly-needed reforms to increase competitiveness. It enables the delusion that October is a good time to hike sales taxes from 8% to 10%. It is not.

What facts led Kuroda to tell reporters last week that "there is no change to our baseline scenario that global growth will pick up sometime during the latter half of this year?" Who knows? Perhaps he hopes the June 28-29 Group of 20 summit in Osaka will end with a dramatic trade war truce.

The odds are firmly against such a children's book ending. Dreams sometimes do come true. But where trade wars are concerned, it is better to see the nightmare ahead and prepare accordingly.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia for his Nikkei Asian Review work.

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