Kuroda Goes to War
First, the background facts. Haruhiko Kuroda is the new Governor of the Bank of Japan (the Japanese central bank). He was appointed by the recently re-elected Prime Minister, Shinzo Abe, with the mission of delivering on Abe’s central promise of pulling the Japanese economy out of a deflationary spiral that has lasted at least 15 years and shows no signs of ending. Kuroda has talked up a storm in advance of and subsequent to his taking office last month, promising to blast Japan out of deflation and get it to a rate of inflation of 2% per annum – within two years. Everyone agrees that this is an extremely difficult target and that it will require extraordinary measures to achieve.
Given that background, there was widespread concern that today, when Kuroda was set to chair his first policy session and to translate his big talk into actions, he would disappoint by doing too little. But that was not the case. Kuroda announced a series of measures which, when stripped of the monetary mumbo-jumbo that is almost impenetrable to laymen, undoubtedly heralds a major shift of policy and justifies the headlines that greeted it as a ‘regime change’. But it is not a revolution: Kuroda is simply going to do much more of the same, i.e. he is going to buy more government bonds, over a wider maturity spread (of up to forty years!) and he will be as aggressive as he can in this campaign.
In order to create inflation, Kuroda must change the entrenched expectations of households and businesses. Everyone has grown so inured to deflation that they expect it to go on indefinitely. There is a huge debate going on, even within Japan but much more so outside it, as to whether this is at all possible – and then there is the secondary debate as to whether the specific measures announced today are sufficient to achieve the goal of shattering the deflationary mindset. Many analysts believe that Japanese society is too conservative to change, and/or that the Japanese demographic decline is so severe that no economic or financial program can alter the underlying trend of contraction that feeds the deflationary spiral.
The second set of facts relates to the immediate impact of Kuroda’s “shock and awe”. The Tokyo stock exchange had fallen by 2%, tracking the declines of the previous day in the US and Europe — but it promptly reversed course and soared by over 4%, to end the day with a 2% rise. The yen, which had more or less stalled out in recent weeks, after falling sharply between November and February in anticipation of an Abe-led monetary splurge, slumped by over 3% against the dollar, the euro and most other currencies. The question now is whether this is a knee-jerk reaction to the announcements, or the kick-off to another leg down in the yen and up in the stock market. But most importantly, does this indicate that Kuroda has done enough to win the credibility he needs to make any headway in his tough task?
The answer will come over the next few days and weeks, but the deliberate policy of weakening the Japanese yen will most certainly trigger negative responses from China and South Korea. Faced with a world economy that is at best sluggish – data this week from both Europe and the US were mostly disappointing – none of the Asian export-led economies can afford to let the Japanese grab market share from them. The Koreans will no doubt seek to weaken their won, and the Chinese will likely stop or even reverse the gradual revaluation of the yuan.
The Japanese policy decisions are important not just for the Japanese economy, but for the entire Asia-Pacific region and consequently their impact will be felt round the world. Fair enough – but how ironic that these developments came in tandem with the news that the neighborhood nutcase, North Korea, has declared its intention to go far beyond the belligerent actions is has undertaken hitherto against its neighbors, and was now not only ‘at war’ with South Korea but was going to attack the United States. Indeed, the Pyongyang regime proudly boasted, it was going to launch nuclear weapons against the US.
The response of the financial markets was not one of panic, nor even did they blow a raspberry. They simply paid no attention whatsoever – surely the greatest insult imaginable to the new and young Kim clown on the tottering throne of ‘the hermit kingdom’. Everything did the opposite of what should happen in the face of a regional crisis: oil prices plunged, precious metals continued to fall, stock markets rose and, above all, nobody said that the North Korean chest-pounding impacted anything, anywhere. Let’s just hope the assumption that Kim is a paper tiger proves correct.