by Nomi Prins
Japanese finance minister Tarō Asō and BOJ governor Haruhiko Kuroda addressed challenges of low global growth rates at the G7 meeting in Sendai, Japan.210 Tarō Asō emphasized adding money laundering and tax evasion, as was occurring in Brazil and Argentina, as problem areas.
The mutual efforts of Asō and Kuroda demonstrated the closeness of Japan’s Finance Ministry and BOJ at a moment when the G7 faced internal tensions. The group was having difficulties convincing Germany to abandon its pro-austerity position for a more flexible fiscal policy. Also, Japan and the United States were not aligned on the yen’s value; Japan feared its growth may be influenced by currency issues. The Japanese leaders had to persuade the group to coordinate actions, from currency issues to fiscal policies.
On May 27, 2016, the G7 warned that Brexit would harm global trade, investment, and job creation. Kuroda concurred, “If Brexit is agreed, it would have a significant and serious impact on the global economy.”211 Japan was concerned about its trade agreements with the United Kingdom, given its financial dealings and companies headquartered there. The United States still complained about competitive currency devaluation and placed Japan and China on a currency watchlist.
Kuroda dismissed those accusations, pointing out that the yen had risen 10 percent in recent months. He emphasized the role of central banks in promoting dynamism in the global economy. For him, the options regarding monetary policy hadn’t been exhausted. “I don’t think for Japan, or the ECB, at this stage that monetary policy has reached the limit.” He defended these practices in the Japanese economy: “I don’t say it will take one year or two years, or something like that,” he said. “It will have a clear impact on the economy soon.”
Promoting growth was also a topic of discussion. The group disagreed on which policies to pursue to confront global stagnation, too. Japan defended the continuity of monetary policy as a tool to promote liquidity and stimulate growth. Germany and the United Kingdom believed that austerity and fiscal discipline were the best ways and criticized the “cheap money.”
On June 14, 2016, still far from his inflation target, Kuroda was feeling increasing pressure from Japanese banks unhappy with his strategy. Japan’s biggest lender, Bank of Tokyo-Mitsubishi UFJ, considered Kuroda’s negative rates a concern and had been against negative rate policy since January, when Kuroda announced it. It threatened to withdraw from the club of twenty-two financial firms that bought government bonds, worried about the low-yield returns.212 Banks forecast their lowest profit in five years. Sumitomo Mitsui Banking Corporation blamed the difficult year on the negative rate policy.
From the day the ECB and BOJ entered negative territory, banks criticized them. Fine with zero percent interest rates that provided them liquidity and cheap money, they were less happy about negative rates coupled with lower profits when economic results were not forthcoming.
On June 15, 2016, as the referendum date on Brexit approached, the Japanese government and BOJ stayed in constant contact with their European counterparts to prepare markets for a possible Brexit, which could bring a shortage of dollar liquidity. The BOJ said it was ready to offer dollar funds to domestic banks via auctions if Brexit happened.213 But Tokyo had no clear plan on how to avoid a yen rise if it took place. The yen had always been a safe haven at times of heightened risk, and the G7 wasn’t against Japanese intervention to hold the currency value down.
With the future of the EU on the line, the Fed kept rates unchanged, though the decision was not unanimous, with Kansas City Fed president Esther George disagreeing.214 The Fed said that recent economic results, especially in the labor market, influenced the decision. Janet Yellen emphasized the importance of momentum to increase rates, arguing it would happen when real, solid signs of economic strength appeared. However, she was unclear about when this increase would happen: “I’m not comfortable to say it’s in the next meeting or two, but it could be.” She acknowledged that Brexit was a factor that led the Fed to exercise more caution.
Kuroda had decided not to expand monetary stimulus until after the United Kingdom’s Brexit vote.215 Plus, the opposition party in the domestic election wanted to discuss negative rates. However, recent gains of the yen made Kuroda reaffirm his commitment to act whenever necessary. But, he noted, “we don’t decide monetary policy based on currency moves.”
When he asked why ten-year government bond yields were at –0.2 percent, Kuroda blamed Brexit: “Our quantitative and qualitative monetary easing has pushed down yields from short-term to long-term. But behind the recent plunge of the 10-year yield is the so-called Brexit vote. That’s making international financial markets somewhat unstable.”
The following day, on June 24, just after the Brexit results were tallied, the Fed said that it stood ready to provide dollars to other central banks via the swap lines set up during the 2008 financial crisis to reduce financial market turbulence. This was ostensibly to counter the instability the vote results initiated and concerns about shortages of dollar liquidity in many places, especially Japan.216
But it also signaled something else: that central banks would use their money-conjuring tools whenever there was a shock to the system—even if that shock appeared to be a political one—to assuage any market or currency moves that might result.
The G7 released a statement saying the central banks were ready to use their “established liquidity instruments” if needed. Abe instructed finance minister Tarō Asō to pay attention to currency markets “even more closely” than usual, to be prepared for actions that might be necessary to temper any volatility provoked by Brexit voting.217
Abe announced, “We need to continue to work toward market stability,” indicating that the Japanese government would not let the yen appreciate excessively against the dollar because it would appear to be a safe-haven currency after the Brexit vote. Asō told reporters he “was instructed by the prime minister to take various, aggressive responses to ensure stability in financial and currency markets.” The Japanese government argued that actions to stop yen appreciation would be in line with the G7 agreement on currency stability.
The next day, the yuan fell to a five-and-a-half-year low against the dollar, and the PBOC dealt with its currency’s weakening after the Brexit vote by setting a sharply weaker midpoint and not intervening in trading.218 A month later, the US dollar fell from a six-week high against the yen after Kuroda said the BOJ saw no need to stimulate the economy with “helicopter money.”219
This comment flew in the face of speculators who believed an aggressive round of stimulus would result from the next BOJ meeting and had bet accordingly against the yen in the foreign exchange markets. Kuroda denied the measure during a BBC radio interview, which led the yen to a 105.41-per-dollar high. However, when the BBC said the interview was done in mid-June, it cooled the yen gains. That’s how sensitive speculators had become.
On July 26, 2016, despite Japanese insistence, Chinese exchange policies were not a topic at the G20 meeting in Chengdu, China. The finance ministers and central bankers were more worried about Brexit.220 After the BOJ announcement that it would double exchange-traded fund purchases, financial shares rallied and Japanese stocks ended higher.221
After the BOJ announced negative interest rates, the TOPIX was the worst performer among twenty-four developed markets. The BOJ raised its target for purchases of exchange-traded funds (ETFs) to ¥6 trillion (US$58 billion), another form of QE, indicating Kuroda’s commitment to offer artificial support to all markets.
Kuroda’s decision provided cover for Abe, who had launched a ¥28 trillion fiscal stimulus package two days earlier. It had been three years since Kuroda forced Japan into an unprecedented easing program, but results remained insufficient. Prices were falling again, and the economy was faltering.
On August 3, 2016, Tarō Asō and Kuroda appeared together in public to show they were united.222 They discussed the bond program and assured they would deal jointly with future pressures that could cause market disrupti
ons. The BOJ injected the third of three rounds of fresh aid into the market: ¥1.2 trillion (US$10.5 billion; €7.8 billion).223 The injection was pure market stimulation. Yet by August 17, 2016, some economists feared this could lead to hyperinflation and uncontrollable currency depreciation, but the BOJ was relaxed about it. They were, after all, the conjurers of money.
Three days later, perhaps facing backlash about the obvious market manipulation maneuver, the BOJ made an odd declaration—there would be no possibility of “helicopter money”224 (which happens when a central bank directly finances government spending by underwriting its bonds). The declaration referred to the government’s plan to issue bonds longer than forty-year bonds, which made it appear as if a monetization of debt was under way. The BOJ said that as long as it was buying Japanese government bonds (JGBs) from the market, it was not directly underwriting (new) bonds to fund government spending. This distinction became blurred as investors bought bonds only to take profits by selling them directly back, in what was called the “BOJ trade.”
One such pressure that hit close to home in Japan was the possibility that interest rates weren’t high enough to make good on payments to pensioners. At risk was the ¥140 trillion (US$1.27 trillion) state pension funds pot—under the eye of Hiromichi Mizuno, the first chief investment officer of the ultra-conservative Government Pension Investment Fund (GPIF). The interest on Japanese bonds made an historic investment in them negligible. The only game in town was the stock market, which, like anywhere else, was fine when it was rising, but a disaster when it wasn’t.225 Abe advocated an asset allocation shift to stocks instead of bonds, which worked in 2014 when the market rose but was less attractive when it sank in 2015. In 2016, he noted long-term returns mattered, not short-term volatility.
Japan and Brazil faced a similar problem, with different causes. Whereas in Brazil disjointed monetary and fiscal policies caused the collapse of social security and pensions, in Japan the problem was more demographic than fiscal. There, an aging population, restrictions on non-Japanese migration, and a sluggish economy caused pressure on the population.
Because of the obvious close relationship between the Japanese government and minister of finance with its central bank, the question about the overall independence of the BOJ returned. Yet, Kuroda was not concerned about such appearances of co-dependence at all. According to him, “Monetary policy is part of broader economic policy, so it’s more than appropriate to communicate closely with the government from the perspective of a policy mix.”226 But, if the Fed were to start raising rates as a sustained policy, rather than as a periodic or one-off decision, Kuroda would have to compensate, as would Draghi at the ECB, by driving their rates down.
This idea of the Fed switching gears and embarking upon a meaningful tightening mode had real legs. On August 26, 2016, at the annual Jackson Hole symposium, Janet Yellen declared the Fed would take a gradual approach toward raising rates.227 She affirmed rates would be increased as solid growth was confirmed, the labor market strengthened, and the inflation rate approached the target of 2 percent. Kuroda, in attendance as well,228 promised, “The Bank will… take additional easing measures without hesitation in terms of three dimensions—quantity, quality, and the interest rate—if it is judged necessary for achieving the price stability target.”229
As a result, the dollar extended its losses, which was counterintuitive because higher rates should have, in theory, been good for the currency and for speculators to see that they could get higher yields on their US investments. Yet the dollar fell against most of its peers and intensified the already 5 percent loss for 2016. The July FOMC minutes showed divergent opinions among committee members over the next course of action on rates. New York Fed president William Dudley and San Francisco Fed president John Williams signaled that an increase might be coming by year-end. Fed Kansas City president Esther George said inflation gains called for a nearer-term rate increase.230
Kuroda shifted monetary policy slightly to target lowering rates on longer-dated Japanese government bonds.231 He still aimed to reach the 2 percent inflation target after years of massive money printing had failed to do so. His new approach was called “quantitative and qualitative monetary easing with yield curve control.”232
The measure reassured markets that the BOJ would continue to buy large amounts of bonds, but the policy reboot seemed to revert huge asset purchases and repair the damages provoked by negative rates of –0.1 percent. Under the new rule, BOJ would start buying long-term government bonds as necessary to keep ten-year bond yields at 0 percent current levels.
Abe praised the shift and said the government would work together with the BOJ to achieve the aims of Abenomics. “The government and the BOJ share the policy task to end deflationary stagnation and achieve sustainable economic growth,” he remarked. “Listen up. Abenomics is for the future. It is for future growth. It is for future generations. And it is for a future Japan that is robust.”
During opening remarks at the dialogue with the New York–based business and financial community of Japan on September 21, 2016, he emphasized the need for promoting structural reform in order to have real effects on the market, especially the labor market.233 Like other major central bank leaders, he was conflating influence over monetary and fiscal policy, overstepping the bounds of his responsibility for the former by commenting on the latter.
According to economic minister Nobuteru Ishihara, Abe was using any means necessary to put the Japanese economy back on track. “Abe has said we need to use all tools available both for fiscal policy and monetary policy and that we need to accelerate our efforts.”234 Tarō Asō added that Japan should not rely only on the BOJ to boost economic growth and fight deflation.235
Five days later, the dollar fell against the yen after a BOJ official commented that the central bank was unable to weaken the yen, despite having every possible policy tool at its disposal.236 The comments confirmed that the BOJ was maintaining a monetary policy that produced effects opposite of one of its (or at least Abenomics’) intents, leading the yen to appreciate. Indeed, the yen had risen by 17 percent since the BOJ had shocked markets by diving into negative interest rate territory. Meanwhile, political tension was building. The Japanese government voiced concerns about the need to improve wages to foster demand and ensure that Abenomics brought results.237 But that was a domestic issue; Japan also sought to augment its foreign reach.
Meanwhile, Japan sought to strengthen its ties with non-US counterparts. Japan was Brazil’s second-largest trading partner in Asia, just behind China, particularly in industry and innovation.238 On October 4–5, 2016, at the nineteenth Joint Meeting of the Brazil-Japan Economic Cooperation Committees held at Keidanren, Tokyo, negotiations to create a working group for a Patent Prosecution Highway (PPH) pilot project between Brazil and Japan pushed that alliance even further.239 Brazil’s finance minister, Henrique Meirelles, participated in the elaboration of a memorandum on economic cooperation in priority areas in the Brazilian economy with Japanese financing. It was signed by the Japanese ambassador to Brazil.240
Such moves, including similar ones in Africa, were harbingers of Japan’s commitment to expand its role in the region and the world and effectively compete with China in that regard.241 Conjured money indirectly funded these initiatives because it was conjured money that purchased the Japanese government bonds (the public debt taken on by the Japanese government) that enabled the government to borrow more to fund international expansion.
Meanwhile, key Asian nations rattling their political sabers prompted each central bank to seek greater global influence—which meant depending on artisanal policies to elevate geopolitical influence. If the BOJ enhanced the size of its balance sheet to fund Japanese debt creation, then Japan could use those funds to finance military or trade agreements or domestic economic pursuits. As the People’s Bank of China (PBOC) faced a falling yuan and the United States’ ongoing accusations of currency manipulation, the BOJ faced a crisis of
confidence. It couldn’t elevate inflation, and its massive easing program wasn’t doing the trick either. Both central banks’ actions had domestic and global implications.
On October 21, 2016, Kuroda said he saw no immediate need to reduce the BOJ’s asset purchases as he shifted focus from expanding the monetary base to targeting rates.242 He told the Japanese parliament that the BOJ might not continue to buy government bonds at the pace of 80 trillion yen annually. Yet, a month later, the BOJ announced its first operation to buy an unlimited amount of securities to maintain its yield-curve target.243
China continued to forge a path independent of the United States. Having achieved inclusion of the renminbi in the IMF’s special drawing rights basket of major reserve currencies on October 1, 2016, China established stronger side agreements with Russia, the rest of the BRICS nations, the Eurozone, and Britain after the Brexit vote. That was no accident but part of a comprehensive strategy to distance itself from the risk the United States and its central and private banking system posed.
This power shift away from the United States accelerated as China increased its economic, military, and diplomatic presence. Into that shift, Japan would soon have to reconsider its alliances—at least from an economic perspective. The PBOC began selling US Treasuries to bolster its currency—depleted by capital outflows, not manipulation. China sold $22 billion worth of US Treasuries in July 2016. (By 2017, its US government debt holdings dropped to their lowest level in six years.) In October 2016, the two largest holders of US Treasuries switched positions: the BOJ overtook the PBOC. By December 2016, the BOJ held $1.098 trillion and the PBOC held $1.058 trillion worth.244
Nine days after Trump’s election victory, on November 17, prime minister Shinzo Abe met with President-elect Trump at Trump Tower in New York City.245 Just before Abe flew to the United States, China’s president, Xi Jinping, reached out to Trump for a meeting on November 14. He was not given an appointment, though he told Trump during their call that “facts have shown that cooperation is the only correct choice” for the United States and China.246 Trump chose to speak first with Abe, who had contacted him on November 9, the day after the election.
