The BOJ Decision


Welcome to our panel on recent actions by the Bank of Japan. Mr Kuroda always seems to be able to surprise the markets, and last Friday was no exception.  We asked our EconVue experts who focus on Japan to comment.  Robert Madsen says that "the best bet is that stagnation persists” and that a more adventurous BOJ policy could have negative ramifications in the rest of the global economy.  Nick Benes believes that the Bank of Japan should refuse any further actions until structural reforms begin, and fears distortions in the stock market that large ETF purchases will bring.  Rick Katz thinks that a combination of fiscal stimulus and monetary easing is necessary.

Panel Discussion

Nicholas Benes EXPERT

I do not think buying ETFs in greater magnitude is the answer to the problem.  Since that is in the stock market, questions arise: a) when and how do they every get out of the positions? b) what is the impact then? Can the answer really be “never”? c) isn’t the size of the total easing necessarily much less then with bonds?  - or if it is big, will it not overwhelm and distort the stock market? d) as ETFs increase in proportion of the total market rapidly because of BOJ purchases, might this not undermine corporate governance reform progress, since passive fund managers of this type tend to skimp the most on shareholder engagement (none) and proxy voting (bare minimum)? and e) might it not also undermine BOJ’s own credibility, since there are those who will say that Mr. Kuroda is “pumping the stock market” at the behest of the Prime Minister?    

Rather, the BOJ should be going public with diplomatic, if slightly vague, suggestions about the type of structural reforms that it thinks need to be accelerated by the government, given the intractable nature of the deflation problem, and in view of the obvious reality that quantitative easing by itself cannot solve that problem. Although it cannot be extremely specific and appear to “micro-manage” what are political policy calls, the BOJ has to communicate to the government that “we cannot continue quantitative easing at this level unless you significantly accelerate structural reforms that will re-ignite private investment and productivity growth, especially by considering additional measures related to labor mobility, women in the work-force (which is very closely related), stewardship, pension governance, corporate governance, deregulation, and investment for innovation.”   This will give the Prime Minister, if he is serious about following through with the (so far sparse) “Third Arrow”, more of a political “carte blanche” to forge ahead faster.  In particular, essentially no progress at all has been made in labor mobility, “womenomics” (other than PR), pension governance, and selective deregulation.  At this point, for Mr. Kuroda to merely say that there is “synergy” between government fiscal policy and the BOJ’s policy, wades halfway into political waters, but accomplishes nothing at all.

I believe the BOJ is running out of alternatives other than this, which should always have been (behind the scenes) its biggest stick in the first place: “No quantitative easing without major structural reforms.“ 

Richard Katz
Richard Katz EXPERT

The lesson should be clear by now: monetary easing alone can neither create 2% inflation nor boost real economic growth. It is, in Japan’s current straits, “pushing on a string.” What is needed is a monetary-fiscal combination.

The right kind of spending and/or tax cuts adds to real demand and thus real growth. In that context, monetary stimulus prevents interest rates from rising and also prevents the privately-held government debt from rising. This is the combination that Ben Bernanke correctly recommended in a 2003 speech in Tokyo. 

It is time that theorists, including Kuroda, who claim that inflation targeting plus money real create inflation and real growth admit that their theory is wrong. Monetary stimulus is necessary but absolutely not sufficient. And, without real third arrow reforms, the fiscal-monetary combo will only provide a temporary fillip, not a permanent solution. It would make Japan stimulus addict.

Robert Madsen EXPERT

It is a mistake to view Japan as unique.  Since the 2008-2009 crisis, most of the developed world has been in what is by at least one definition—several years of GDP growth substantially below trend—a moderate depression.  In such a situation monetary policy is by itself not particularly stimulative.  Since there is weak demand for goods and services, demand for capital languishes, banks cannot lend aggressively, and additional infusions of liquidity by central banks merely pool up on balance sheets.  Since that credit is not lent on, the effect on commerce and investment is negligible.

The standard for judging economic stimulus of all sorts in a depression is simple:  does it create additional demand?  All three of Prime Minister Abe’s policy “arrows” are by this measure impaired.  Fiscal stimulus creates demand in the short term, but with a shrinking population and deeply entrenched deflationary expectations, it is highly unlikely to stimulate a resurgence in private-sector spending.  Structural reform is even more dubious.  Most deregulation and corporate restructuring is designed to cut costs, to render workers redundant and lower wage bills—put simply, it is by intention deflationary.  Some of what Japan has done in the last years has been more helpful than that: changes in capital market and pension regulations and improvements in corporate governance, for example, encouraged the movement of some money from those most inclined to save to those more willing to spend.  But on balance structural reform has been, and will continue to be, a marginal factor at best and potentially a harmful one.  Given these flaws in the fiscal and reform “arrows,” the probability of greater demand through the mechanisms envisioned by the Abe government is minimal.

The most promising avenue is the textbook solution for a country with excess savings and inadequate demand:  aggressive depreciation and the importation of foreign demand.  Singapore and Switzerland have done this, running for many years current account deficits many times larger than Japan’s.  What that would require in Japan is, in its most brutal form, a shift in the BOJ’s target from domestic financial assets to foreign assets or even currencies.  The yen would fall sharply and after a painful adjustment, manufacturing and exports would expand.  There are significant reasons, however, why Tokyo will not pursue this policy, including politicians’ unwillingness to erode the value of savings that are concentrated among older people who vote and a desire not to offend foreigners and thereby lose international influence.  But the most important factor at this point is the national debt, which is so large that it could not be financed at significantly higher interest rates.

So the best bet is that the stagnation will persist.  Neither the elected government nor the BOJ have the stomach to do what is necessary to engender demand and GDP growth.  Given the size of the national debt, moreover, implementing marginal changes and hoping for the best may be the only responsible policy option left.  Perhaps paradoxically,  further vacillation and feckless policy initiatives are best for the rest of the world as well; for if Japan were to devalue the currency sharply in order to import demand, it would worsen the deflationary pressures that are causing so much trouble everywhere else.  



The economy grows two ways by an increase in the labour market and productivity. Japan is doomed to weak growth and deflation as long as its population shrinks and ages. No mature economy can create the productivity levels required by the downward structural pressure on growth due to the change in the population. Typical of the self-defeating policies that Japan imposes on itself is forbidding dual citizenship that forces young Japanese to choose Japan over countries that allow dual citizenship when they have that option through birth or lineage; there are many other examples. Japan has always chosen 'being Japanese' which includes a slow economic decline rather than a sharp adjustment, and given the challenge posed by population change, inadequate immigration and naturalisation policies. Better to accept that Japan is in the first 35 years of a hundred year decline when the population will bottom out at about 60 million people and hope that China doesn't turn it into a province rather than impoverishing the country with a deep devaluation.