By Todd Crowell
TOKYO
As the structures of ‘Abenomics’ begin to crumble and a fifth recession in 15 years threatens, the Bank of Japan has doubled down on inflating the money supply in the hope of getting Japanese consumers to start spending.
The bank surprised everyone last month by announcing plans to buy 80 trillion yen ($721 billion) worth of government bonds with new money, a financial tactic known as quantitative easing.
The action makes Japan a global leader in a world of austerity measures. Only two days before the Japanese declaration, its American counterpart, the Federal Reserve Board, said it was ending reliance on quantitative easing.
Quantitative easing was seen as the first ‘arrow’ in Prime Minister Shinzo Abe’s quiver of proposed remedies for Japan’s ailing economy, and perhaps the only one that has been a success. That is reason enough, perhaps, to give it another go.
One of Abe’s first steps after forming a government in 2012 was to appoint Haruhiko Kuroda as the bank’s governor, an unabashed proponent of inflating the country’s economy.
The reaction to his first move in April 2013 was heartening. The stock market soared to new heights, the yen weakened -- and continues to do so. The recent action also boosted the stock exchange by about five percent.
While the first arrow was a success, the second and especially the third arrows, namely fiscal stimulus and structural reform to the economy, have stalled, and with them the economy as a whole.
Abe gambled that Japan would shrug off the raising of national sales tax from five to eight percent last April with relatively little impact on consumer spending. That has proven to be a miscalculation as consumption has stalled and the country worries about falling into another recession.
By mid-November, Abe will have to decide whether to risk raising the tax once again to 10 percent. He can hope that the bank’s actions will give him some cover if he decides that Japan’s fiscal health demands it.
This comes at a time when negotiations with the U.S. over the Trans-Pacific Partnership are at an impasse, unpopular nuclear power restarts are on the horizon and he was embarrassed by recent resignations of two women cabinet ministers, whose appointments were designed to demonstrate his commitment to empowering women.
Thus the bank’s recent actions can be seen as a kind of rescue operation. Abe can hope that the drag on the economy of the tax hike can be offset by renewed spending in anticipation of rising prices.
In Kuroda’s mind, Japanese have been in the grip of a “deflation mindset,” in other words they were conditioned to expect prices to fall. In that scenario it made sense for people to hang on to their wealth and wait for prices to fall further before spending.
He hopes to replace that with an “inflation mindset,” which would encourage people to spend in anticipation that prices will rise in the future.
Speaking to reporters after the banks’ decision, he said: “It is important for the Bank of Japan to strongly commit to achieving its price target firmly embedded in peoples’ minds.”
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