"If this guy prints more money between now and the election, I dunno what y'all would do to him in Iowa, but we would treat him pretty ugly down in Texas."
Bank of Japan Gov. Haruhiko Kuroda pulls a face at a press conference on Oct. 7 at the central bank's headquaters in Tokyo.
Such were the words of Texas Gov. and Republican presidential hopeful Rick Perry, speaking in Iowa, in August 2011. The "guy" he mentioned was U.S. Federal Reserve Chairman Ben Bernanke, whose policy of quantitative easing, Perry went on to describe, as "almost treasonous." If the Texan's words seemed to come from an old-school Hollywood western, so did the response of Bernanke. Evidently aware that "a man's gotta do what a man's gotta do," as the actor John Wayne is said to have put it, he journeyed to El Paso, in deepest Texas, and explained the purpose of monetary policy to soldiers at Fort Bliss.
In most developed countries, central banks are, in theory, independent entities. Immune from the hurly-burly of politics, they are supposed to formulate the best possible policies in a cool-headed, technocratic manner. In reality, monetary policy has always been highly political, and it has become increasingly so in the aftermath of the global financial crisis. Economic conditions are more complex and confusing than ever. Central bankers need intellectual flexibility, a clear understanding of the balance of economic risks and, not least, the Bernanke-style courage to face down hostile elements, like Gary Cooper standing up to gun-slingers in Fred Zinnemann's 1952 film "High Noon."
Haruhiko Kuroda, governor of the Bank of Japan, finds himself today in a position not dissimilar to Ben Bernanke in 2011. The BOJ's initial burst of unconventional monetary policy has clearly achieved results -- inflationary expectations are higher, asset markets have surged, and corporate profits are booming. Even so, the reflationary process is at an early stage, and there is little "feel-good factor" at street level. It is no surprise, then, that the patch of economic weakness Japan has experienced in the past six months has emboldened critics of Kuroda's monetary policy, and of the broader stimulus program championed by Prime Minister Shinzo Abe, which is widely referred to as Abenomics.
Former Finance Minister Hirohisa Fujii claimed recently that quantitative easing was a mistake, and called for intervention in the currency market. Hideo Hayakawa, former head of the BOJ's research institute, called for the bank to start tapering its asset purchases after less than two years of reflation. Representatives of small and medium-size enterprises in Japan's central-western Kansai region have complained to Kuroda about the weak yen.
Other critics of Abenomics were comfortable under deflation and would be happy to see it return. Some represent interest groups that suffer from currency weakness but kept quiet while benefitting from the strong yen of previous years. More general is the search for a plausible narrative to explain away the poor performance of the Japanese economy in recent months. The yen is a useful scapegoat, even though in trade-weighted terms it has hardly changed since the start of the year.
Multiple enemies
The real reason for the economy's loss of momentum is not hard to identify. It is the decision to hike the consumption tax by 3 percentage points in April, to 8%, which had the predictable effect of stalling household spending. The financial bureaucracy, the major opposition parties, the business community and the media were all complicit in this policy blunder and are loathe to admit it. Worse, pressure is now mounting on Abe to approve a second tax hike for 2015. One can only hope this time he will have the gumption to withstand it.
In terms of monetary policy, the key point is that you cannot aim at two targets at the same time. If Kuroda were to attempt to stabilize the yen, it would mean abandoning the 2% inflation goal that is at the heart of Abenomics. Both he and Abe should make it clear that this is out of the question. Furthermore, in a deflationary global environment a weak currency is a useful weapon. It benefits not just exporters, but domestic industries that compete with imports, raises the yen value of Japan's bulging portfolio of overseas assets, and encourages companies to favor onshore production -- as exemplified by auto-parts maker Denso's recent decision to add new capacity at home.
Kuroda's other enemy is complacency. The BOJ's internal research places too much emphasis on output gap analysis, which has been abandoned by the Fed and the Bank of England, and, worse, opinion surveys that have no track record of accuracy. The reality is that achieving the inflation target is a multiyear process that will probably require several rounds of QE. The next round is required soon, because the recent decline in the oil price means that Japanese consumer inflation will likely be closer to 0% than 2% by next summer.
After his confrontation with Perry, Bernanke went on to introduce a third round of QE. He then announced the tapering strategy that would bring the Fed's asset purchases to a gradual close, and rode off into the sunset, much like Alan Ladd as the wounded hero in "Shane," George Stevens' classic 1953 western.
Japan understands westerns, too, as the recent Japanese remake of Clint Eastwood's "Unforgiven" shows. If Kuroda can despatch the forces of resistance as coolly as Ken Watanabe does in the final confrontation, reflation should soon be back on track.
Peter Tasker is an analyst with Arcus Research in Tokyo.
