For Shinzo Abe, it isn’t enough to see Sony Corp. and Panasonic Corp., two icons of industrial Japan, reduced to junk-debt status. The man who probably will become prime minister next month might do the same for the yen.
That is the upshot of his desire to browbeat the Bank of Japan into unlimited easing. Granted, his Liberal Democratic Party did that for most of the half-century it was in power until 2009. But Abe’s designs on the BOJ smack of a monetary jihad that would do more harm than good.
Polls suggest Abe will get a second crack at running Japan after a Dec. 16 election. His first one, from 2006 to 2007, was an exercise in mediocrity and focused on education and military matters. Round two will home in on ending deflation. To Abe, that means opening the monetary spigot indefinitely.
Abe may well revolutionize the central bank, though in unhelpful ways. He would get to pick the BOJ’s top three jobs, including replacing Masaaki Shirakawa with a more compliant governor. Yet Abe, in a series of comments, stepped way over the line of ignorance and veered into financial irresponsibility. Maybe the BOJ could do more. It might, for instance, pay greater attention to how the strong yen is gutting Japanese companies such as Sony and Panasonic, which Fitch Ratings Ltd. lowered to speculative grade on Nov. 22.
Abe’s interest in creating inflation ignores the dilemma hovering over Japan: the largest public debt in the industrialized world. Let’s say Abe gets his wish and the BOJ achieves 3 percent inflation in short order. That would drive up the ultra-low borrowing costs on which Japan depends. Sub-1 percent bond yields are the glue holding together a rickety financial system. A jump in yields could devastate the economy and trash the yen.
That would end badly for a nation with a rapidly aging population, waning competitiveness amid China’s ascent and risk- averse public and corporate sectors. A chaotic plunge in the yen is in no one’s interest, least of all a government that needs to import more oil to offset the nuclear reactors that were taken offline after last year’s enormous earthquake.
The BOJ’s global clout is already in doubt. When it intervenes in currency markets or adds new stimulus, traders yawn. Making the BOJ a more formal creature of politicians, turning it into a People’s Bank of China, isn’t the answer.
Abe is backpedaling a bit. His call for the BOJ to buy construction bonds to support government spending ran afoul of many Japan watchers. Abe took to Facebook to clarify, a rare step for a Japanese politician and one that has many economists clicking the “like” button to follow his monetary musings.
Not that they necessarily actually agree with what he is proposing. One of the more pointed rebuttals came from former Finance Minister Hirohisa Fujii. At 80, Fujii is one of the few policy makers who recalls growing up amid the insanity and devastation of World War II.
“The central bank underwrote the government’s war machine, allowing the government to fight foolish wars,” he said last week. Of Abe’s desire to alter the BOJ’s charter, Fujii added, “Revising the BOJ law would mean a revival of the 1942 legislation.” The law made the BOJ an instrument of government, a relationship that wasn’t really ended until 1997.
Scary stuff. It makes claims that Federal Reserve Chairman Ben S. Bernanke has gone too far look quaint. Hard-money enthusiasts, such as Texas Congressman Ron Paul, would be aghast at what Abe has in mind for the monetary authority that backs one of the three main international currencies. Compared with Abe’s expectations for his central bank, Bernanke looks almost hawkish.
Has it not occurred to Abe and the LDP that monetary stimulus alone won’t revitalize Japan? There seems to be little recognition that deflation is a symptom of Japan’s two-decade- long economic drought, not its cause. Far more good would come from taking a fresh look at fiscal and tax policies. Ending Japan’s balance-sheet recession requires new strategies to increase demand from all directions.
The year ahead promises to be another rough one for the world economy ― no end in sight to Europe’s crisis, America’s recovery proceeding slowly and China struggling to support growth. As 2013 unfolds, economists will wonder what Prime Minister Yoshihiko Noda was thinking when he raised consumption taxes in such a shaky environment.
Why not put Japan’s next finance minister and BOJ chief in a room together and demand a new course? Japan’s debt already equals more than twice the size of the economy, and the days of trying to generate growth with huge public-works projects are over. So is the time when monetary stimulus could save the day. The financial levers must be re-assessed. The same goes for deregulating the economy with more-flexible labor markets and fewer barriers to trade.
Perhaps it’s all talk. Maybe Abe will pick up an Economics 101 textbook over the holidays and think better of hijacking his central bank. At the very least, Abe’s monetary fixation portends something troubling about his second turn as prime minister: He is coming to the job with some bad ideas. If only his Facebook age had a dislike button.
By William Pesek
William Pesek is a Boomberg View columnist. The opinions expressed are his own. ― Ed.
(Bloomberg)
