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Opinion

The Bank of Japan just admitted defeat

With monetary policy failing, Kuroda should switch target from consumer prices to wages

Albert Einstein: "Insanity is doing the same thing ... but expecting different results."   © Kyodo

The Bank of Japan did nothing on Tuesday. That, at least, is the considered view of the financial intelligentsia, which had been bracing for policy fireworks. It is also wrong.

BOJ Gov. Haruhiko Kuroda actually did something big this week: He admitted defeat. Kuroda essentially did so by not adding more stimulus or employing new strategies, even as his team delayed indefinitely its timeline for achieving 2% inflation.

Sure, Kuroda threw some rhetorical pyrotechnics at markets with vague talk of policy tweaks and flexibility. What the BOJ really said, in the eyes of researcher Michael Every of Rabobank, is that it is "absolutely stuck" in the quantitative-easing weeds. Yet there is something that needs to get unstuck: Tokyo's antiquated belief the BOJ is solely responsible for raising living standards and revitalizing the economy.

Shinzo Abe's Liberal Democratic Party has long trafficked in the economic equivalent of the definition of insanity given by Albert Einstein who said, "Insanity is doing the same thing, over and over again, but expecting different results."

For nearly 20 years now, Tokyo has prodded the BOJ to print more and more yen expecting different results. In April 2013, it was Kuroda's turn to try, try again, and he did so with history's most audacious monetary campaign. And yet, the deflationary mindset persists.

It does not take an Einstein to see that Japan needs a new strategy. Had you told Masaru Hayami, the father of QE, that rates would still be below zero three governors later, neither he nor his team would have believed it. And yet, aside from helping the Japanese economy to muddle along, Tokyo has little to show for the easing strategy Hayami pioneered in 2001.

The U.S. first dabbled in QE in 2008. Yet within five years, the Federal Reserve was tapering. By December 2015, it was hiking interest rates and policymakers have not looked back since. The Bank of Canada is already in tightening mode, while the European Central Bank and Bank of England are stepping toward monetary normalcy. The BOJ, by sharp contrast, is locked in the "on" setting indefinitely.

It is time we dropped the collective denial that Kuroda's team will ever succeed. It will not -- not unless Tokyo suddenly does some heavy lifting on structural reforms. That process starts with politicians admitting that Kuroda lacks the tools to kick off the virtuous cycle Prime Minister Abe envisioned.

How did we get here? In 2012, Abe promised three "arrows" to revitalize Japan, but really only fired one. Kuroda deployed his bow beginning in April 2013, and followed with any number of subsequent volleys.

Abe's second arrow -- fiscal loosening -- faces intense headwinds. While 2020 Olympics construction is creating forward thrust, a 2014 sales tax hike and another planned in 2019 are a drag on confidence.

Yet deregulation, the third and most vital arrow, remains largely in the quiver. Moves to tighten corporate governance met with success, raising average returns on equity. The 13% rise in the Nikkei 225 Stock Average over the last 12 months, though, has not translated into notably higher wages. Nor have such tweaks prodded companies to scrap seniority-based promotions and unproductive work schedules.

The BOJ is really a digital institution in an analog reality. Kuroda has done a yeoman's job pushing the BOJ's tentacles into assets from old-school government bonds to exchange-traded funds. While the BOJ's decision to buy up 75% of exchange-traded funds irks free-marketeers, it marks policy innovation. It adds liquidity to stocks without messy moral hazard debates about nationalizing particular shares.

Kuroda, too, is pulling off a cutting-edge balancing act on cryptocurrencies. Even as he raises concerns about the safety of digital money, Kuroda is helping position Tokyo as a premier bitcoin trading and listing hub. Anything Kuroda can do to enhance Tokyo's appeal as a finance center adds energy to Asia's No. 2 economy.

The analog part includes demographics and a rigid business culture. Just as Kuroda's predecessor, Masaaki Shirakawa, warned, Japan's deflation has more to do with an aging population than the money supply. Retirees do not tend to buy flats, cars, smartphones, the latest fashions or splurge on pricey leisure activities. Wages among millennials who might, meantime, are not rising much. Nor is job security.

The BOJ needs a big assist. Sure, Kuroda could do more -- buying huge blocks of mortgage-backed and asset-backed securities. He could get more creative about putting cash in consumers' hands. If the last 64 months -- or 204, for that matter -- taught us anything, though, aggressive easing is not enough. It is futile without bold steps to increase innovation and productivity, loosen labor markets, cut red tape, narrow the gender-pay gap and encourage greater risk-taking.

Abe hoped Kurodanomics would get the job done. Unless Abe launches the most important phase of Abenomics, Japan's reflation hopes will increasingly prove fleeting.

The BOJ should put the onus on politicians by changing targets from inflation to wages -- or some level of gross domestic product. At the moment, GDP is about $4.9 trillion. Why not target an increase to $5.2 trillion or $5.5 trillion? There is a disconnect, for example, between Abe's free-trade deal successes and the BOJ's price target. Trade deal effects tend to come in two steps: First prices drop, then in the years ahead incomes hopefully rise. If the BOJ's only metric for success is inflation, Tokyo could face a public perception problem.

Credit where it is due: Abe is wisely helping to fill a void in free-trade development created by America's protectionist U-turn under Donald Trump. Abe also is adding greater competition into a rigid and fossilized Japanese model that is now holding it back. Yet lower tariffs with the EU and 10 Trans-Pacific Partnership members may further depress inflation.

This is a balancing act. As freer trade increases efficiencies, reduced pricing power could, ironically, add to downward pressure on wages at first. Freer trade could boost incomes in the longer run, but the near-term effect means policymakers need to get busy liberalizing the industrial system. One way is capitalizing a startup boom. He and Kuroda could put pressure on Japan Inc.'s biggest companies, arguing that the more they fatten paychecks, the bigger the gains in GDP and household spending.

By targeting boosts to demand, Kuroda could drive the shift to structural changes that give executives confidence to share profits with workers and invest. It also would force politicians to learn from past mistakes and recalibrate accordingly. It is insane not to change course after 20 years of failure, yet here we are.

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 work for the Nikkei Asian Review.

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