This month marks eight years since the Bank of Japan embarked on one of the most audacious journeys to end deflation in economic history. How far has the team of Governor Haruhiko Kuroda progressed?
Not at all. Indeed, by certain measures, the BOJ appears to be reversing course. That is the tragic implication of Kuroda’s admission on Tuesday that his team will be fortunate to reach 1% inflation by 2023, rather than 2%.
Where things went wrong teaches politicians from Seoul to Washington a plethora of lessons.
When Kuroda announced the 2% goal in April 2013, he intended to do so over a two-year period. The BOJ started with a series of monetary “bazooka” blasts and committed to injecting at least 80 trillion yen, or $740 billion, into the government bond market each year. This policy of overwhelming force reduced the yen by about 30%, increasing exports and corporate income.
Following that, Kuroda & Co. continued to expand its toolkit. The BOJ expanded and broadened its debt purchases, effectively monopolizing fixed-income trading. It amassed stock holdings by exchange-traded funds. Thus, five years into the trip, the BOJ’s balance sheet exceeded the size of Japan’s $5 trillion economy, a first for a Group of Seven nation.
Nonetheless, the desired results never materialized.
Inflation, for instance, made a brief appearance. Consumer prices only reached 2% at their peak. And when it did, it was the bad kind: imported through higher energy prices, whose effects were amplified by an undervalued currency.
The more serious issue is that salaries have never increased as much as the government intended. At first, Japan Inc. eased into the process by providing annual wage increases here and there. Yet a country that has been plagued by deflation since the 1990s needs consistent, sizable, and sustained wage increases to enliven consumer behavior. Not a 2% increase here and a few bonuses here and there.
When then-Prime Minister Shinzo Abe employed Kuroda in 2013, his government attempted to resurrect the 1980s. Abe was elected Prime Minister in December 2012 on the strength of an ambitious strategy to restructure an ageing, unproductive economy as China soared in terms of gross domestic product. The threat of shock therapy injected some vitality into Japan’s global stride.
Abe, on the other hand, outsourced the work to the BOJ. Abe unveiled an audacious Big Bang strategy aimed at liberalizing labor markets, reducing bureaucracy, catalyzing a startup boom, empowering women, and importing waves of foreign talent. It was discovered to be a sequence of very small pops.
The most visible victory for Abe was the enhancement of corporate governance. Increases in the number of independent directors and return on equity have helped propel the Nikkei 225 Average to 30-year highs. However, this did not result in CEOs sharing earnings with employees. Nor has Japan been inundated with foreign takeover attempts.
Abe’s ultimate goal was to reintroduce old-fashioned “trickle-down” economics. He gambled that restocking corporate coffers will be sufficient to initiate a virtuous cycle of massive wage rises, which would stimulate demand and thereby drive even greater profits. This, along with the wildly successful staging of the Tokyo Olympics, was deemed sufficient to bring an end to two decades of declining prices.
As illustrated by how easily GDP crashed 15 months ago when Covid-19 arrived, the gamble failed. Within months, Tokyo was struggling to squander over $2.2 trillion, or 40% of GDP, on falling demand. Abe resigned a few months later, with his survey numbers in the low 30s.
Few economists seem to understand how the Tokyo Games, which are scheduled to begin in July—depending on Covid-19 cases—will set the economy back. Abe bet that the event’s sugar rush will pay off spectacularly. Worse, he squandered almost all of Tokyo’s change opportunities in the run-up to the Olympics.
As strange as it might sound now, Team Abe claimed that preparing for the Games would internationalize business practices, spur creativity, and result in corporate executives relocating their headquarters from Hong Kong and Singapore to Tokyo. It was successful in 1964. Abe reasoned that it would happen again.
To be fair, Japan had no way of anticipating the pandemic—or a one-year wait for Tokyo 2020. However, even greater than the loss of overseas tourism is the “opportunity cost” of Japan’s economic stagnation over the last eight years.
Yoshihide Suga, Abe’s successor, now faces the return of deflationary pressures that investors believed were over. Suga, on the other hand, faces an economic ammunition shortage. Fiscal and monetary bazookas of unprecedented magnitude have already been deployed.
Fortunately, China is spearheading the global recovery, ensuring a demand for Japan’s export behemoths. Shipments to the mainland increased 37.2 percent year over year in March, led by chip-related equipment and car manufacturers.
However, the export spikes from 2013 to 2019 were not accompanied by CEOs fattening their paychecks or large investments in new industries or increased creativity. This type of virtuous cycle is much less possible now that Japan is experiencing a fourth wave of Covid-19 infections.
Japan’s abject inability to launch a vaccine program also reflects a bureaucracy in desperate need of reform in 2013. Rather than that, we got the Olympics.
Today, the handwringing is about Tokyo’s nearly $25 billion investment in an Olympics that could never take place. Yet history would almost certainly add a zero or two to how a few weeks of sports diverted Japan’s attention away from developing economic muscle in the decade ahead.