Wednesday, August 23, 2017

"How the Bank of Japan can get really crazy"

From Asia Times, July 26:

This is the first in a two-part series on how the Bank of Japan can reboot efforts to revive the country’s deflation-plagued economy
Bank of Japan Governor Haruhiko Kuroda is watching his back even more than he’s surveying for hints of inflation in the world’s third largest economy.
The knives are out for the most famous economist in Tokyo, and why isn’t hard to figure out.

With Prime Minister Shinzo Abe’s approval ratings lower than Donald Trump’s, Japan’s leader is desperate for a win.

Voters might look beyond the latest cronyism cloud over this government if wages were rising and the economy was humming along five years into Abenomics.

But wages aren’t rising so Abe is looking where embattled Japanese leaders always do when the going gets tough: the BOJ.

Tokyo tongues are wagging as Abe advisors Nobuyuki Nakahara and Etsuro Honda (who’s called for “regime change”) suggest Kuroda should go.

Koichi Hamada, a key Abenomics architect, wants the governor to get a second term come March. Kuroda is clearly being nudged to step on the monetary gas anew — or clean out his office.

That could mean another round of shock-and-awe easing and a sharply weaker yen.
As Kuroda’s BOJ comes up short in generating inflation, what are its options?

Obviously, Kuroda needs a major assist from Abe. The BOJ’s historic easing, its cornering of bond and stock markets, was meant to grease the skids for a deregulatory Big Bang.

But steps to loosen labor markets, encourage entrepreneurship, modernize the tax code, empower women and boost productivity are few and far between.

Lacking confidence, companies are sitting on trillions of dollars of cash rather than fattening paychecks or investing in new industries.
The stink of scandal distracting Abe’s team, and buzz about another Cabinet reshuffle, has all eyes on the BOJ.

The Oxford-trained Kuroda has resisted going further down the quantitative-easing path, lest the BOJ enter People’s Bank of China territory.

But then, one could argue the BOJ, which has been at zero rates and beyond for 20 years, is about as independent as indentured servant. In other words, why stop here?

Fire up that helicopter
The BOJ’s titanically large purchases have immobilized the government bond market, in which volatility has become a rare phenomenon.

Its massive purchases of exchange-traded funds –- about $53 billion annually –- are distorting the stock market.

The BOJ should aim its firepower elsewhere. Kuroda could buy up large blocks of mortgage-backed and asset-backed securities. He could load up on tens of billions of dollars of corporate debt or foreign bonds to weaken the yen.

Why not also take local-government debt onto the BOJ’s balance sheet?

Look at the weakest among Japan’s 47 prefectures and offer them fiscal space to borrow anew to cultivate startup booms, finance improvements in productivity or pay for infrastructure improvements.

Next, Kuroda could get really creative and buy up distressed properties to refill rural government coffers. He could overpay for plots of unused municipal land, white-elephant city-hall buildings, stadiums, museums, desolated ski resorts, amusements parks and those infamous “international” airports with one overseas flight.

Go the full Takahashi
The BOJ could monetize debt the way Tokyo did in the early 1930s under then-Finance Minister Korekiyo Takahashi....MUCH MORE

Part II: Why Japan just can’t quit the ‘Deflationary Mindset’