by Nomi Prins
By that time, Kuroda’s zealous adoption of the Fed’s policies were actively helping major Japanese banks thrive from a liquidity standpoint. On September 13, 2013, the BIS Quarterly Review revealed that Japanese banks had become the largest suppliers of cross-border credit worldwide, with 13 percent of market share, after having hit a low in 2007. They had even overtaken US banks, which had 12 percent of market share, and German banks, which had 11 percent. This demonstrated a restoration of confidence and the growing economic importance of Japanese banks to levels last seen in the 1980s before the 1990s crisis.
However, while Japan was improving, Europe was flailing, with its citizens keeping a lid on their expenditures because of economic uncertainty. By October 2013, German fears of European inflation had been replaced by a disinflation threat.141 Since April, the monthly consumer price index data for the Eurozone had fallen short of the ECB’s 2 percent inflation target. If the ECB’s focus really was inflation, the ECB would opt for loosening monetary policy further. Draghi said the bank would “look to the medium term in order to assess the outlook and… decide about further action on the front of interest rates or… any other instrument that is available.”142
On October 31, 2013, the Bank of Japan, Bank of Canada, Bank of England, European Central Bank, the Fed, and the Swiss National Bank announced that their existing temporary bilateral liquidity swap arrangements would become standing arrangements until they decided to stop them.143 They would provide liquidity in any of the five currencies in the agreement and, according to the central banks, would ease lingering strains in financial markets and knock-on negative effects on economic conditions.
Three weeks later, the yen fell as the dollar crossed the mark of 100 yen (100.04) for the first time in two months, after a quarterly report indicated that growth had fallen, which brought new expectations about more stimuli.144 Currency markets were moving more on the basis of expectations about central bank intervention than on economic growth.
During the week, finance minister Tarō Asō reminded markets that Japan could intervene if the yen moves intensified.145 A weak yen was the cornerstone of “Abenomics” because it meant that Japanese exports would be more attractive to other countries. The yen had depreciated 15 percent against the dollar during 2013, and Japan’s main stock index had risen 43 percent.
On December 27, 2013, the euro reached its strongest level versus the dollar in more than two years.146 Draghi had said the ECB would assess the capital position of the region’s banks at the end of 2013. Counterbalancing the path of the Fed and BOJ, the ECB had not been expanding its balance sheet yet, giving additional strength to the euro. The yen hit a five-year low versus the dollar and euro, motivated by risk-taking momentum rather than safe haven seeking. It was its ninth consecutive week falling against the dollar, a period of movement that had not occurred since the 1941 oil crisis had affected Japan intensely.
INDEPENDENT CONJURERS
The year 2014 brought a hint of divergent monetary policies among the G3 central banks (the Fed, the BOJ, and the ECB). The Fed announced it would end its QE program on October 29, 2014.147 But it still clung to its unconventional zero interest rate policy (ZIRP). To counterbalance the retreat of one of the Fed’s money-conjuring processes, the ECB began pumping more money into the euro financial system, Japan pushed “Abenomics,” and Kuroda pressed money-conjuring programs even harder.
The dollar gained considerably on the possibility that, with the Fed putting the brakes on one aspect of its strategy, rates would eventually rise to show that strength had sufficiently returned to the US economy and, with that, so would the dollar. Temporarily, the yen depreciated and the euro waffled as a result of the Fed’s announcement.
Vice chairwoman of the Federal Reserve System Janet Yellen was nominated by President Obama to replace Bernanke at the helm of the Fed on October 9, 2013. On January 6, 2014, the US Senate confirmed her nomination. She was sworn in on February 3, 2014. Overall, she was accepted among US policymakers, though some Republicans considered her too dovish. She had, after all, always supported Bernanke’s money-conjuring programs.
Kuroda’s expanded easing policy had the effect of suppressing the yen, which benefited exporters. The flipside was pain for households relying on imports that became more expensive as a result of the weaker yen. Abenomics pegged yen depreciation as a way to confront deflation. The risk was that public opinion could change because of the higher prices of imports.
As mentioned, on January 16, 2014, a few days before leaving the Fed, Bernanke defended his QE program, underscoring its important effects on the economy. He admitted that the only risk he found credible, among the “many” mentioned by critics of QE and ZIRP, was that bond buying could prompt financial instability, although at the moment, in his view, asset prices were in line with historical norms.
By January 26, the yen had shed 20 percent of its value compared to the prior year, indeed spurring the Japanese economy as exporters recovered their profits.148 But the weaker yen concerned Japanese importers—and, from a currency-wars perspective, other exporters.
Notably, both China and South Korea, two of Japan’s main regional trade rivals, expressed concerns about the strong slide of the yen. The United States therefore welcomed Japan’s economic rebound, saying that if the yen’s fall was the result and not the aim of Abe’s policies, Washington supported it. Still, on January 16, 2014, Treasury secretary Jack Lew warned an audience at the Council on Foreign Relations that Japan’s “long-term growth can’t be rooted in a strategy that ultimately turns in any way towards reliance on an unfair advantage because of the exchange rate.”149
The next day, Japan reported a record annual trade deficit after the weak yen had driven up the cost of energy imports. The deficit had risen to ¥11.5 trillion (US$112 billion), a 65 percent increase from a year earlier. The year 2014 would be the third consecutive year that Japan, a country traditionally known for its current account surplus, reported an annual trade deficit because it was costing more money to import necessary products relative to profits from exports.150
Less than a month later, on February 18, 2014, the BOJ extended its special loan programs to boost economic growth. Kuroda indicated the possibility of additional future stimulus measures.151 The Nikkei 225 rose 3.1 percent and the yen fell on that decision to double the funds available to banks.152
Kuroda affirmed that the QE expansion sent “a strong message of support” to banks to increase lending to help the economy. He said, “If risks materialize, we will not hesitate adjusting policy, but for now Japan’s economy is on track and moving in line with our forecasts.”153 Central bank leaders, despite years of conjured-money policy, still had to explicitly ask banks to lend their cheap money to their customers and, ostensibly, the real economy. But asking was very different from requiring.
On April 11, 2014, speaking with Kuroda at a news conference in Washington, finance minister Tarō Asō said that the G20 welcomed Japan’s efforts to revive the economy.154 This followed discussions about the effectiveness of Japan’s current growth strategy as captained by Abe.
About a month later, on May 5, Kuroda announced that consumer inflation would reach its goal of 2 percent within the following year.155 He refused to comment on whether he would increase the money base more than his prior annual amount of between ¥60 trillion and ¥70 trillion (US$683 billion) per year.156 Even as the BOJ reduced its growth estimate for 2014, he assured the public that consumer spending and employment were improving.
Here lay the crux of central bank priorities. The central banks’ concerns and policies were mainly focused on price stability (or inflation), but with rates at zero and global growth slow everywhere, a rise in domestic inflation didn’t necessarily imply growth improvement or better levels of employment. Using inflation as a goalpost, then, was an implicit means for central bankers to align with hitting investors’ expectations and vice versa. In the absence of true inflation or growth, central bankers, especially i
n developed nations, could keep conjuring money, which flowed to banks and market speculators who borrowed it cheaply and in large quantities, because real inflation was so difficult to attain in a faltering economy.
The connection of the conjured money to social issues was minimal to nonexistent because it wasn’t up to central banks to make sure the money it provided large financial institutions in return for assets would reach the real economy or be used to create jobs. It was a hope perhaps, but not a policy. It was even less likely in developed countries, where market levels relied on speculative activities and the general perception that money flowed sufficiently to keep them rising, than in developing countries, which tended to regulate capital flows more closely.
Meanwhile, the Nikkei 225 performed the worst among major global stocks, reflecting rising doubts about Abe’s economic policies. As of May 30, it had fallen for four straight months.157
In the wake of the US financial crisis, Japan’s position as a potential superpower was overshadowed by the expansion of its long-time adversary, China. But Japan appeared to have a shot at increasing its global footprint as the second-largest economy in Asia if it could elevate its influence, including with the BRICS. All it needed was the right balance of money and diplomacy, on top of Abenomics and conjured money.
On that note, Kuroda moved to increase Japanese influence by endorsing the BRICS bank. He supported its ability to stoke global growth from a different standpoint than that of the established powerhouse development banks, such as the World Bank and IMF, and other Japanese-Western leading entities, such as the Asian Development Bank.158
A few weeks later, on August 13, the BOJ registered a drop in its GDP growth forecast.159 Sure enough, as per the logic of price targeting to keep money conjuring going, Kuroda confirmed his commitment to the inflation target and to keeping up with his QE policy until that target was reached. He also remarked that the Fed was moving toward tightening and thus saw no reason for the yen to appreciate against the dollar, removing the blame for its weak state.
By early October, Tarō Asō had changed his tune. He claimed the yen was not particularly weak even though it had hit a six-year low against the dollar.160 Prime Minister Abe also showed little concern about the currency, considering its decline both good and bad for the economy. That was because they both wanted to keep conjured-money policy going.
Although some businesses in Japan and some consumers would suffer from an overly depreciated yen, overall it seemed positive for major export companies. This factor influenced the political stability of Abe’s government because Japan relied so much on exporters to sustain economic growth, even if its population’s consumption was based on imports. As Abe said, “In general, a weak yen hurts some companies by pushing up import costs. On the other hand, it’s positive for exporters and companies doing business overseas.”161
On October 8, 2014, FOMC released meeting minutes of its September 16–17 meeting. The body expressed concern that a rate hike in the United States could have unintended negative consequences on global financial markets.162 Policymakers worried about the dual threats of a stronger dollar, which might slow the inflation target progress, and a global slowdown, which could be intensified by an increase in US rates.
The next day, at an event at the Peterson Institute for International Economics in Washington, DC, when secretary of the Treasury Jack Lew was asked whether he was comfortable with recent dollar appreciation or with the European claim for euro depreciation, he repeated his oft-made call on China to stop forcing down the value of its currency.163 “It is wrong to get into exchange rate competition with the purpose of promoting advantage one over the other,” he said. “On the other hand, we have called on many countries of the world to take decisive action to get their economies to grow.”164
Despite some differences dealing with exchange rate policy, the United States, Europe, and Japan routinely collaborated on money-conjuring policies. With China, perhaps because the PBOC was not one of the G3 trio, the United States seemed to have little tolerance, despite the yuan’s movement toward appreciation.
Yen depreciation further strained Japanese policymakers. At the start of Abenomics, the yen’s drop was supposed to be one of the key elements used to confront inflation and foster growth. But now, having discussed it with Kuroda, Abe finally had to acknowledge that a weak yen had also been negatively affecting import prices and hurting households and small companies.165
As the weak yen hurt the average consumer’s buying power for imported items, tensions grew over Abe’s policies. Abe’s need to achieve his inflation goals was so acute that he had summoned Kuroda to the Japanese Diet to assure the body of the economic benefits of a weaker yen. This was an often-repeated Kuroda refrain throughout Abe’s tenure, and one that would erode public confidence in him and his policies, mostly because inflation barely budged anyway.
Abe wanted to preserve the public’s admiration of him as long as he could. But he was in a tough spot in regard to the yen because the public didn’t benefit directly from a weak yen, whereas the BOJ’s QE program helped the government by buying substantive amounts of its debt.
THE FED ENDS QE, THE BOJ INCREASES IT
The Fed officially ended the largest financial stimulus program in US history by finishing the third round of QE (QE3) on October 29, 2014.166 The Fed had bought trillions of dollars of mortgage and US Treasury bonds to keep rates at zero and provide cheap money to slosh around the banking system and financial markets. Between November 2008 and October 2014, the Fed had doubled the size of its balance sheet through QE, from $2.106 trillion to $4.486 trillion, the largest expansion from any stimulus program in history.167
In the process, global popular resentment of banks—the big beneficiaries of the Fed stimulus—and central banks escalated. Wall Street profits increased considerably, whereas ordinary Americans and citizens around the world lost out. Yet banks had the nerve to complain that QE was not good for them, even as they took advantage of its cheap liquidity, accessing money without having to pay much interest on it.
Kuroda picked up where Bernanke left off. On October 31, 2014, Japanese policymakers revealed surprise stimulus plans. The BOJ announced it would inject ¥80 trillion each year into the financial system, mainly through the purchase of government bonds. Before that, the BOJ had injected ¥60 trillion to ¥70 trillion per year.168
Kuroda was determined to avoid a return to deflation in the Japanese economy. He paraphrased Draghi, saying, “Whatever we can do, we will.”169 By November 22, the yen dropped to 119.98 per dollar, a seven-year low. Abe called early elections to renew his mandate and continue his economic policy. While Kuroda told the press that Japan’s fiscal responsibility lay with the government, Japanese finance minister Tarō Asō said the currency had been falling too quickly. The yen had lost 16 percent of its value since May 2014.
In Europe, tensions surrounding the Greek financial crisis and the election of the leftist Syriza party mounted. Although part of the “troika” (from the Russian “group of three”—the European Commission, IMF, and ECB), Mario Draghi demonstrated more caution about Greece’s situation than his colleagues, especially German policymakers. He initiated extra QE measures in attempts to revive growth and cut the deposit rate further into negative territory.
Meanwhile, in collusive style, when one central banker takes a break, another picks up the slack, rendering the average global result the same. Draghi had given Kuroda a breather. So Kuroda put the brakes on easing, temporarily, despite international market expectations of another large bout of easing, because of the declining yen. The stronger yen depreciation made imports more expensive for households, which elevated criticism from Japanese citizens.
However, Kuroda, Abe, and Tarō Asō recognized the difficulties in reaching the inflation target set by the BOJ and in reversing deflation. The biggest Japanese exporting companies publicly praised them—but that optimism didn’t translate to the main economy. Consumer spending had fallen f
or six straight months, and deflation was prevalent. It began to harm Kuroda’s credibility as the BOJ governor, and Abenomics in general.
CREATIVE MONEY MAKING
On January 25, 2015, while at the World Economic Forum in Davos, Kuroda told Bloomberg TV that the BOJ might need to get creative with the monetary stimulus to maintain the expansion program. “There are many options and I don’t think it’s constructive to say this or that could be done.”170 His remarks signaled his openness toward more conjuring. Up to that point, the BOJ confined most of its asset purchases to buying Japanese government bonds, but Kuroda was suggesting this could be augmented with different purchases.
He asserted that every next move depended on expectations regarding the inflation rate. The Japanese economy was showing signs of recovery, especially on exports, which rose 12.9 percent in December 2014 compared to in 2013. However, Japanese households and small companies weren’t feeling it because of the higher cost of living and stagnant wages.
Asked about the QE program starting in Europe, Kuroda concurred it would be “beneficial to the world economy including the Japanese economy.” He added, “We very much welcome this action.”171 He couldn’t say anything different about the ECB’s policies because they echoed his own and that of the Fed in one collusive money-conjuring juggernaut.
On February 10, 2015, at the G20 meeting in Istanbul, Kuroda noted that the body (which increasingly represented an “alternative” opinion to the G7’s) had not criticized his monetary policy, indicating that the international community approved of BOJ policies. He stated, “I felt it’s well understood internationally that Japan will make positive contributions not only to its own economy but to the global economy if the nation ends deflation and achieves 2 percent price stability through quantitative and qualitative monetary easing.”172
