by Nomi Prins
According to his logic, what was good for Japan was good for the globe. That would have been true to the extent that Japanese companies used their extra cheap money for development projects that helped regional economies as well, but actively producing was different from simply achieving price stability around a particular inflation target. The latter was just a figure; the former was more tangible relative to job and wage growth that in turn spurred consumption and price inflation. But it remained to be seen just how much money Japan would pour into development versus driving up asset prices.
Kuroda’s statements converged with Jack Lew’s affirmation that Japanese policies that led to a weaker yen did not necessarily qualify as an unfair move. It was both a technical and subjective qualification by the US government in support of Abe’s government and Japan.
In a parliament session on February 12, 2015, Abe touted his policies as leading to a fifteen-year high in wage growth,173 which, in regard to minimum wage, had been trending upward even before he got into office.174 What he did not say, however, was that job stability was an issue or that the ratio of temporary to permanent jobs was near an all-time high.175 Abe had promised voters that they would feel the benefits of Abenomics. He had also been using words like hope and urge to move wages at major Japanese companies since he began his term.
It might have seemed naive to just hope wages would increase, but that was a cornerstone not just of Abenomics but of the entire conjured-money experiment. It was all based on hope and magical interpretation—hope that banks would lend their cheap money for productive economic projects that would spur job creation and wage elevation, and magical interpretation of large composite figures like GDP and inflation to gauge whether or not that was happening. In Japan, however, the period of Abenomics and conjured money did not show any obvious correlation to wage growth, just as it didn’t in the United States.176
A week later, on February 18, after the BOJ’s monetary policy meeting, Kuroda commented that, although the central bank noted public complaints about the yen’s depreciation, “There is nothing more to say than it is desirable for exchange rates to move stably in reflection of economic fundamentals.”177
Abenomics had led to a fall in the yen’s value of 50 percent against the dollar since the end of 2012. Although the main aim—promoting Japanese major exporters’ sales—was achieved, the increase in major import prices had negatively affected consumers and small companies.
According to the Wall Street Journal, Kuroda followed the wishes of the Abe administration, which did not want the BOJ to increase easing. But that didn’t make sense from the standpoint of the inner coordination of BOJ policy and Abenomics. Kuroda did not commit to ceasing the BOJ’s monetary easing. He announced, “I don’t see any need to consider additional action for now.”178
The decrease in the yen’s value, resulting from the BOJ’s monetary stimulus and Abenomics, made exports more competitive overseas. Toyota, for instance, achieved a record in sales of nearly $230 billion and a record net profit of $17.9 billion.
At a news conference that took place north of Tokyo, on March 5, 2015, Takahide Kiuchi, a member of the policy board of the BOJ, publicly expressed support for Chinese reform and the opening of the currency system. In a gesture of support and taking credit for its successes, he said, “China is already applying lessons from Japan’s experience. Even when growth is slowing, Chinese policymakers aren’t taking policy measures that could heighten financial imbalances. That’s very wise of them.”179 Privately, he expressed concern about the risk of capital outflows. Japanese officials feared that it could bring consequences to the regional economy.
By mid-April, more than a hundred Japanese regional banks were speculating in foreign debt and equity-like securities markets.180 The BOJ, by virtue of negative rates, had driven them out of government bonds and into more speculative investments (ironically funded by the BOJ’s cheap money). This represented a departure from the existing model. For the past twenty years, regional Japanese banks had invested their excess deposits in Japanese government bonds, earning the difference between the near-zero rates paid to depositors and the 1 percent or 2 percent they could get from bonds.
Two days later, Koichi Hamada, an adviser to Abe, told the press, “I don’t think it’s a bad thing to send a signal that the selling of the yen is coming closer to its limit bit by bit.”181 Since the start of Abe’s government in 2012, the yen had dropped 23 percent. On April 14, as it traded at 119.77 against the dollar, Hamada warned that a 120 level would be too “considerably weak.”
On May 15, at the Yomiuri International Economic Society in Tokyo, Kuroda delivered a confident speech. He touted the results of his policy, though he hadn’t hit his inflation target. “The mechanism of QQE has been operating as intended.… the Bank will continue to steadily pursue QQE to achieve the target of 2 percent at the earliest possible time.”182 Kuroda was buying bonds, but this process offered no direct link to economic stability.
Regionally, certain financial wrinkles evoked concern. By June, Chinese stocks had shed more than 40 percent of their value since the start of the year, which worried the Japanese.183 To avoid past political, geopolitical, and economic mistakes, Japan suggested Beijing move slower in its financial reforms. The shock devaluation of the yuan in August 2015 served as a reminder of how quickly China could lose control of its markets.184 As China faced billions of dollars of capital outflows and was using its reserves to avoid dramatic impacts on the monetary system, Japan was concerned about contagion.
But Japan didn’t need to worry on one score, the yen. It was perceived as a safe-haven currency in the region, and bolstered by Kuroda, who on June 10, told Japan’s lower house financial affairs committee that the yen was unlikely to fall further since it was already “very weak.” His declaration provoked the sharpest rally in the yen during 2015.185 His words took the place of true economic strength with respect to markets.
That, plus global events such as a Greek bailout deal being more likely with creditors lifted Japan’s stock market on June 24, 2015, to its highest level in more than eighteen years.186
A month later, the Japanese media dubbed Kuroda “Helicopter Haruhiko,” reassigning the moniker that had been used to describe Bernanke, because of his policies of seemingly dropping money, or financial stimulus, from the skies, as did his Fed counterpart.
At a parliamentary session on August 24, 2015, Abe, though he publicly recognized that the BOJ’s 2 percent inflation target was becoming harder to achieve because of falling oil prices, expressed confidence in Kuroda’s methods. “We think it’s unavoidable that [the BOJ] hasn’t been able to achieve its original objective.” He added, “We understand the Bank of Japan’s explanation that achieving the target is in fact getting difficult.”187
The BOJ decided to keep monetary policy unchanged in late October even with reductions in economic forecasts and the expectation that it would not reach its 2 percent inflation target until 2017. The inflation target forecast was revised from 0.7 percent to 0.1 percent for fiscal year 2015.188 The ¥80 trillion stimulus program of buying government bonds was retained. In response to criticism, Kuroda told the audience at the Japanese National Press Club, “We have delayed the timing for reaching our price target but this is mainly due to falling oil prices.”189 He dismissed the notion that his program was losing credibility.
On November 21, Abe announced that Japan would relax the conditions of its yen loan program for emerging countries in Asia as it relied on infrastructure exports to boost its economy. He pledged ¥1.2 trillion (US$10 billion) in loans for public infrastructure projects in other countries as part of Japan’s ¥13 trillion initiative. The loans would be jointly provided by the Japan International Cooperation Agency and the Asian Development Bank.190 It was a bid to raise a Japanese financial and diplomatic flag. As Abe stated in a visit to Kuala Lumpur for the twenty-seventh Association of Southeast Asian Nations summit, “The pace of growth in Asia is gaining steam wit
h each passing year. [The implementation of] yen loans should not be left behind.”191
Japan reviewed its loan scheme, making it more suitable to regional countries, partly to balance China’s strong presence in infrastructure development projects in Asia, especially projects pursued by the China-led multinational development initiative, the Asian Infrastructure Investment Bank (AIIB), which Japan had not joined. Japanese finance minister Tarō Asō had indicated interest in joining the AIIB, but later reversed his stance. And partly to make a bid for expansion.
On December 16, 2015, after seven years of ZIRP, the Fed announced a rise in the target range for the federal funds rate, from 0–0.25 percent to 0.25–0.5 percent.192 Fed chairwoman Janet Yellen said she believed that with “the economy performing well and expected to continue to do so, the committee judges that a modest increase in the federal funds rate is appropriate.” She claimed it was the beginning of a process “likely to proceed gradually.”
GOING NEGATIVE
To maintain an average of zero percent interest among the G3, after the Fed hiked rates, the BOJ countered by dipping into negative rate territory on January 29, 2016. Kuroda chopped the cost of ten-year debt. That meant Japan could finance current and new debt even more cheaply for the next decade. It was part of Japan’s insistence that monetary policy combined with Abenomics fiscal policy could jump-start economic growth, no matter how long it took.
By the end of January 2017, this raised the BOJ’s total holdings to ¥482 trillion (US$4.3 trillion) in assets, of which ¥415.3 trillion (US$3.7 trillion) were Japanese government securities.193 The amount tripled after Kuroda took over the helm, to a size slightly smaller than the Fed’s book at $4.5 trillion, but with more government bonds and a GDP a quarter of the size. The ECB’s book at $3 trillion had grown 55 percent since Draghi became head in November 2011.194 The top three artisanal central banks held nearly $12 trillion of debt.
The Fed’s hike sent the global markets into a downward tailspin. On January 28, 2016, in an unexpected measure and after a tight dispute (5 to 4), the BOJ decided to turn Japan rates negative to encourage borrowing and to drive up inflation.195 It was a preemptive measure to protect against the effects of recent global economic difficulties on Japanese business confidence and rising deflation. It surprised markets mainly because Kuroda had informed the Japanese parliament in December 2015 that he would not go that way on monetary policy. It was also—intentional or not—a further rift with US policy.
The BOJ’s decision was “to apply a negative interest rate of –0.1 percent to current accounts that financial institutions hold at the bank.”196 It was called “qualitative and quantitative monetary easing (QQE) with a negative interest rate” because it left unchanged the record asset program decision to continue to inject ¥80 trillion per year by purchasing government bonds. Denmark, Sweden, and Switzerland already had negative interest rates of –0.3 percent.
Said the BOJ, “The Bank will introduce a multiple-tier system which some central banks in Europe (e.g., the Swiss National Bank) have put in place. The outstanding balance of each financial institution’s current account at the Bank will be divided into three tiers, to each of which a positive interest rate, a zero interest rate, or a negative interest rate will be applied, respectively.”197
The negative rate took effect on February 16, 2016. The Nikkei ended the day up by 2.8 percent, and the Shanghai market had a 3.1 percent rise, after months of losses. The yen fell against the dollar. But effects over the yen’s value (–1.4 percent) after the BOJ’s decision to pursue negative rates were less significant than when the BOJ had started quantitative and qualitative easing in April 2013, when it dropped 3.4 percent; or when the program had expanded in October 2014, prompting a 2.8 percent decrease.198 It was as if the Japanese money-creation machine was losing its potency.
Negative rates offered the elite a respite from thinking that the markets were going to crumble. They extended that thought into their assessment of the economy as a whole. On April 14, 2016, at the G20 meeting in Washington, financial leaders were heartened by what they considered the “global recovery” and recovery in the financial markets since their February meeting in Shanghai. However, they observed growth remained “modest and uneven” amid “continued financial volatility, challenges faced by commodity exporters and low inflation.”199
Jack Lew said that China and Japan should pursue structural reforms to help the process. He said China should reduce excess industrial capacity and Japan should promote strategic reforms in specific sectors. Japanese finance minister Tarō Asō criticized the agreements on currencies at the G20 but suggested no appropriate action to prevent exchange rate moves.
Concerns over the effects of a “Brexit”—a British vote to leave the EU—traversed the BOJ, Japanese government, and private banking system. A decision of that magnitude could prove incredibly destabilizing; with the uncertainty it could bring along, it had the capacity to rupture the prevailing financial system—in the worst-case scenario. From a coordinated trade and labor agreement perspective, it could also wreak havoc over the currency markets and trade relationships.200 The BOJ worried such a move could cause the yen to rise against a weaker euro that could result from a tear in the status quo of nations associated with it. That would increase the problems Japan faced concerning currency appreciation, on the yen’s status as a safe haven. The dollar had fallen 7.6 percent against the yen for the year and 6.4 percent in the first quarter, the biggest quarterly decline since the third quarter of 2009.
According to the Financial Times, on April 25, 2016, the BOJ faced pressures to ease monetary policy owing to the high level of the yen. Although some BOJ members wanted more time to evaluate negative rates, the FT said that it depended largely on Kuroda’s opinion.201
Kuroda spoke to an audience at Columbia University in New York, saying that monetary policy was positively affecting economic growth.202 Yet the move from 111 to 120 yen per dollar during the year affected business confidence and restored the deflationary process by making imported goods cheaper. The BOJ had three options: move deeper into negative territory, buy assets faster than the current ¥80 trillion per year, or alter the nature of asset purchases.
The April Fed meeting went as expected. The FOMC kept rates unchanged and said it would move forward “with gradual adjustments in the stance of monetary policy.”203 The decision was not unanimous. Esther L. George, president and chief executive officer of the Federal Reserve Bank of Kansas City and a member of the Federal Open Market Committee, voted against, advocating a 25-basis-point hike. That same day, the BOJ decided to keep rates unchanged.204 After the decision, the Nikkei fell 3.6 percent and the yen, which was at 111.70 per dollar before the announcement, hit 108.15.
When Japanese monetary authorities entered negative territory, the immediate effects over the yen were evident. “There is plenty, plenty of room to push down the negative rate,” Kuroda said, reiterating, “We are going to do whatever is necessary.” Asked about the effects on Japanese banks’ profits, Kuroda claimed, “We never decide monetary policy based on whether financial institutions are for it or against it.”205
That might have been what he said in a public statement, but Japanese banks were specifically benefiting from QE. It allowed them to sell assets to the BOJ in return for more-liquid forms of capital, like cash, which in turn required them to keep less reserves at the central bank because their books appeared more liquid, but in effect they were simply exchanging less-liquid assets for cash. In theory, they had more money to lend to customers, but they weren’t obligated to do so—they could simply buy their own shares or lend big corporations cheap money with which they could buy their own shares (a practice that funneled artificially fabricated money into boosting the Japanese and US stock markets propelled by historically high levels of corporate share buybacks). It was such an easy game to play, too. Banks could lend money easily to their main corporate clients, who, with the confidence of betting on a sure thing
—that their stock would rise if they bought it—were a better “bet” for banks than lending to small business owners in the Main Street economy, who didn’t have the capacity to self-invest, so to speak, in such dramatic fashion or manifest such quick results. Plus, corporate clients pay for politicians and policies in a far grander and more direct way than Main Street.
Infusions of conjured money could also artificially elevate the prices of the remaining assets because of the demand for the ones that the central bank bought. In addition, the BOJ was the biggest buyer of Japanese stocks in 2016, which meant it manufactured money just to bet on its own market, which artificially lifted the prices of those shares as well.
As the central bank of Japan, the BOJ declared it “carries out currency and monetary control to achieve price stability, thereby contributing to the sound development of the national economy, as stipulated in Articles 1 and 2 of the Bank of Japan Act. To this end, the Bank encourages short-and long-term interest rates to remain at target levels and purchases assets, mainly through open market operations.”206 Nowhere in its official mandate does it say that the BOJ is also supposed to influence fiscal policy—which is the domain of the government.
On May 3, 2016, the yen hit an eighteen-month high against the dollar on speculation over whether the BOJ would intervene to halt a currency appreciation that might harm its inflation target.207 So far that year, the yen had risen 12 percent against the dollar. Abe was about to travel to Europe, where he would try to set conditions for a possible intervention in the yen, a move some European and US policymakers opposed.
On May 12, Republican candidate Donald Trump said that the financial reforms enacted by the Obama administration had been harming the US economy, and he promised he would dismantle them as soon as he was elected.208 On the other hand, Trump provided his opinion on the Fed’s monetary policy, agreeing with the low interest rates and stating, “I’m not a person that thinks Janet Yellen is doing a bad job.”209
