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Opinion

The Fed officially joins Bank of Japan in liquidity trap

Quantitative easing has lessons that even Japan has failed to learn

| Japan
Last week came the admission from U.S. Federal Reserve chairman Jerome Powell that many saw as inevitable: America is officially trapped below zero interest rates, along with the Bank of Japan.   © Reuters

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."

Jerome Powell might want to bone up on his Japanese-language skills as the U.S. Federal Reserve goes the way of peers in Tokyo.

The Fed, of course, had long since joined the Bank of Japan down the quantitative easing rabbit hole. That was in the aftermath of the 2008 global crisis, seven years after the BOJ pioneered QE. Last week, though, came the admission from Powell many of us knew was inevitable: America is officially trapped below zero with the BOJ, and indefinitely so.

Yes, Gov. Powell offered a 2023 timeline for reappraising the Fed's epic bond purchase program. But he probably means 2033 and, odds are, he knows it given Japan's own misadventures.

If Prime Minister Yoshihide Suga wants to save a few yen, he could just furlough BOJ Gov. Haruhiko Kuroda's entire Tokyo staff. Just replace them with a computer program and move on. My point here is not to denigrate the hardworking ranks at the BOJ. It is to highlight how this QE experiment just is not working out.

Sure, we can blame the fact consumer prices just fell for a seventh straight month on COVID-19. Yet, even before the pandemic, Kuroda's titanically large stimulus since 2013 never got inflation more than halfway toward the 2% target. And even that was "bad" inflation -- imported via rising energy costs.

That puts Kuroda in the unfortunate role of BOJ leader crying wolf. The more he claims the central bank "will not hesitate" to do more while standing pat, the more bond traders will assume the entire institution is on holiday anyway. How can Kuroda regain the momentum and, perhaps, show Powell's Fed a way out of this liquidity trap?

First, the BOJ must stop applying conventional thinking to wildly unconventional conditions. It has been roughly five years since Kuroda fired the "bazooka" that gave his tenure such authority. His giant monetary blasts from 2013 to 2016 weakened the yen, generated record profits and were ideally timed with a global economy experiencing a rare synchronized growth spurt.

Those blasts included making the BOJ the biggest buyer of stocks. Kuroda greatly ramped up purchases of exchange-traded funds in 2016. By 2018, the BOJ found itself in the awkward position of majority shareholder in 40% of all listed Japanese companies. That same year, its balance sheet topped the size of Japan's $5 trillion economy, a first for a Group of Seven nation.

Now globalization's longest-running momentum trade is creating an embarrassment of riches: a roughly $130 billion profit on the BOJ's stock bets as of March 1, according to NLI Research. Thanks to the roughly $55 billion of ETF buying the BOJ does each year, the BOJ now has stakes greater than 5% in 485 Japanese companies.

These figures might make the People's Bank of China blush. And it creates an obvious "moral hazard," meaning that this giant, well, subsidy program rewards mediocrity. The BOJ is not even the only "whale" propping up shares. So is Japan's $1.6 trillion Government Pension Investment Fund.

If you are a top Japan Inc. executive enjoying the Nikkei Stock Average's surge toward 30-year highs, why bother investing in innovation? Why enact painful restructuring or staff changes when Kuroda & Co. has your back?

Thanks to the $55 billion it invests in exchange-traded funds each year, the Bank of Japan now has stakes greater than 5% in 485 Japanese companies.   © Reuters

Kuroda's team seems to realize this a problem. On Friday, the BOJ signaled it may be throttling back on its 6 trillion yen annual target for ETF purchases. It also widened the movement range around its 10-year bond yield target to 0.25 percentage points from around 0.2. Yet this is merely the least the BOJ could have done to remind the globe its Tokyo headquarters is still there.

It is high time the BOJ surprised markets for the first time in years. One way: deploying large chunks of the stock windfall to fund programs to boost innovation, productivity and training, and pour its stock gains into the services industry.

The BOJ also could lead the change it seeks in corporate circles. It could target stock purchases at companies sharing profits with workers, promoting ample numbers of women to management and upping investments in research and development. The BOJ could buy the corporate bonds of companies scrapping cross-shareholding arrangements, adding loads of outside directors or the planning necessary to bring production back to Japan.

Kuroda's team could incentivize regional governments on the front lines of an aging, deflation-prone nation. The quid pro quo could be that the BOJ absorbs the local debt of places cultivating a thriving startup scene. Kuroda could use his gravitas to lobby Suga's government to do another round or two of 100,000 yen ($917) cash payouts to all Japan residents.

The BOJ also needs to devise a genuine exit strategy as this "Hotel California" gets a bit too crowded with central bankers from Washington to Frankfurt to Sydney. It is hard not to connect the dots to the classic Eagles tune about how "you can check out any time you like, but you can never leave" and the post-2008 economic order.

The trouble with the Japanization with which Powell's team is grappling is that even the place that imparted this dilemma to the globe still has not learned its main lessons either.

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