‘Zombified’ Japan shows the world how not to spend $5 trillion

Bank of Japan Governor Haruhiko Kuroda is often thought to have the toughest job in central banking.

Since 2013, it has built up an incomprehensibly huge balance sheet of $5 trillion, which exceeds the annual output of Asia’s second-largest economy. This unprecedented hoarding of government bonds, stocks and other assets began when deflation was Tokyo’s biggest challenge. Today, it is the inflation risks in the context of soaring global commodity prices that keep Kuroda on edge.

All of this makes Kuroda’s job easier than you might think. His only real option is to do nothing, possibly until well into next year (including this week’s political meeting).

If Kuroda is doing more than the BOJ has been doing for over 20 years, by opening the monetary taps further, the 11% drop in the yen this year could accelerate in a way that would spook global markets. Shrinking cash and government bonds would shake, while the Japanese stock market could crash.

With its zero interest rates, quantitative easing and negative yield innovations, the BOJ has built arguably the best – or surely the most unique – monetary mousetrap there is. Unfortunately, he got trapped inside.

Really, if indebted Japan wanted to save a few billion dollars every year, it could just shut down the BOJ for a while and hand over its monetary functions to a computer program. The result could be the same. All kidding aside, the BOJ is on autopilot for the foreseeable future.

The answer, of course, is that Prime Minister Fumio Kishida’s Liberal Democratic Party is seriously considering reviving The animal spirits of Japan. In 2013, Kuroda was hired as part of what then seemed like a once-in-a-generation Big Bang of deregulation.

Then-Prime Minister Shinzo Abe took office pledging to increase innovation, loosen labor markets, boost productivity, empower women, catalyze a startup boom and seduce multinationals to have their headquarters in Japan. Abe enlisted Kuroda to set the stage for the promised supply revolution to come.

It never happened, making the BOJ the main event. Kuroda found himself forced to save the day with massive asset purchases. Now, with Japan importing inflation faster than BOJ officials predicted, Kuroda finds his monetary cupboard empty and his policy toolbox running out of options.

Enter Team Kishida, who must now find a way forward as increasingly strong headwinds slam into Japan.

Again, BOJ trump”decreasingis out of the question. In the meantime, a real squeeze seems about as likely as a population that has been steadily declining for years and then suddenly increases. That leaves Kishida’s 205-day-old government in charge.

Kishida spoke of a good game of imposing a “new capitalism” that seeks to rekindle innovation and redistribute wealth to the middle class. So far, however, it hasn’t put any significant improvements to the dashboard. This needs to change, and fast, if Kishida hopes to incentivize corporations to raise wages and start a virtuous circle of increased consumption and growth.

Ultimately, the BOJ’s $5 trillion stimulus boom backfired. In 2000, the BOJ became the first major monetary authority to cut rates to zero. A year later, in 2001, he was the first to try EQ. Things accelerated in 2013, when Kuroda took control of the bond and stock markets through exchange-traded funds, making the BOJ the largest holder of Japanese public and private markets.

Yet this massive corporate well-being the problem of the “zombies” of oversized Japan. By flooding the markets and helping companies generate record profits, the BOJ has dampened any impulse to restructure, recalibrate, rethink or take big risks that could have helped Japan regain the world leadership in technology, machinery and technology. transportation that has raised living standards in recent decades.

The irony is that in trying to revive things, the BOJ’s excessive largesse has zombified large swaths of the economy. It’s an economic horror movie few have seen before.

Kishida’s immediate challenge is to preserve growth in the current quarter. This week, Tokyo unveiled a $48 billion emergency economic plan to soften the blow of rising global inflation, in part caused by Russia’s invasion of Ukraine. It is a worthy use of his government’s time and political capital.

The greater need, however, is to take bold steps to increase competitiveness and create more economic energy from scratch. They are needed to change the dynamics of a system that has long been dominated by huge export corporations at the top of the economic food chain.

This creates a disconnect between Japan’s desire to play a leadership role in the global economy and the direction Asia is heading. Like India, Indonesia and other Asian economies are churning out waves of tech unicorns, Japan weighs well under its weight in the startup department.

Strange as it may seem, Japan would be much better off if the BOJ hadn’t spent decades supporting underperforming sectors, assets and companies. But the incentive structure in the third-largest economy has been distorted by a $5 trillion ATM that continues to produce unlimited waves of cash.