Home Market Analysis Bank Of Japan’s $5 Trillion Bet Is Going Awry In A Hurry

Bank Of Japan’s $5 Trillion Bet Is Going Awry In A Hurry

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Bank Of Japan’s $5 Trillion Bet Is Going Awry In A Hurry

For years now, economists have debated whether the Bank of Japan’s ultraloose policies were a loser, figuratively speaking. Now we have proof of the literal losses from Governor Haruhiko Kuroda’s team.

As of the end of September, the BOJ was at least $6.3 billion in the red on its massive stockpile of Japanese government bonds. This is the first time in the Kuroda era that began in March 2013 that the BOJ announced a loss on assets it’s been hoarding. That, not surprisingly, has investors wondering the extent to which the BOJ’s stock purchases, via exchange-traded funds, might be under water, too.

Yet this is a logical moment to take stock of where Kuroda succeeded and failed in his charge to end deflation and revive Japan’s animal spirits. The grade isn’t great.

It’s complicated, of course. And it’s worth noting that Kuroda, whose term ends in April, was true to his word that he’s doing what he could to put the fallout from the 1980s and 1990 in Tokyo’s rearview mirror. It was Kuroda’s version of then-European Central Bank head Mario Draghi’s famous “whatever it takes” pledge to stabilize economies.

Kuroda, though, was in many ways set up for failure. When he took the BOJ job, Kuroda was under the impression that then-Prime Minister Shinzo Abe was about to engineer a Big Bang. After taking power in December 2012, Abe promised to cut red tape, loosen labor markets, increase productivity, catalyze a startup boom, empower women and attract overseas talent to end deflation once and for all.

Then Abe effectively pulled Kuroda aside and said: I’m kidding! It’s all up to your BOJ team.

That’s how Abenomics morphed into Kurodanomics. And it explains why Japan’s recovery hopes never panned out. Sure, Kuroda bought up more than half of all outstanding government bonds. His BOJ became the biggest investor in Japanese stocks. It worked quickly to drive the yen sharply lower in a beggar-thy-neighbor ploy to boost exports.

By 2018, five years into the Kuroda era, the BOJ’s balance sheet topped the size of Japan’s $5 trillion of annual gross domestic product. In other words, that $6.3 billion loss could be just the beginning.

But long before Kuroda took the reins, past BOJ leaders had long been switching the yen printing press onto the “high” setting. Back in 1999, Japan became the first Group of Seven nation to slash interest rates to zero. In 2000 and 2001, it pioneered the quantitative easing that is now common place around the globe.

As a result, Japan’s challenges pivoted from the supply of yen to the uses for all that cash. True, Kuroda found a higher gear in 2013, turning the BOJ stimulus machine to “11.” But without help from Abe to reinvigorate supply-side growth drivers, Kuroda’s BOJ never had a shot. This same all-talk-no-action cycle prioritizing zero rates over structural change explains why innovation in both the US and Europe is also waning.

In Japan’s case, 23 years of zero rates—or often, sub-zero borrowing costs—deadened the urgency and tolerance for disruption. If you’re a lawmaker, government policymaker or corporate CEO, why bother rethinking, recalibrating, restructuring or reanimating the innovative spirits when the central bank has you covered?

The cost of two-plus decades of arguably the most generous corporate welfare history has ever known? Japan is watching China climb the economic ladder, Indonesia beating it in the tech “unicorn” race and a very few international CEOs even entertaining moves to Tokyo or Osaka.

Now, we can add actual dollar losses in the neighborhood of Liechtenstein’s annual GDP. This is the BOJ’s largest deficit since 1998. The cause is government bond yields being pulled higher by the most aggressive Federal Reserve tightening cycle since the mid-1990s. That, and Japanese inflation rising the fastest in 40 years, up 3.6% in November year-on-year.

There’s a supreme irony here. Kuroda doesn’t get the credit for the inflation that Japan is suddenly experiencing—Vladimir Putin does. Russia’s Ukraine invasion and the resulting surge in global commodity prices did more to flip the script away from deflation in 10 months than Abenomics did in 10 years.

Yet this isn’t the kind of price normalization that Japan needs. It’s “bad” inflation of the “cost-push” variety that dents business and household confidence. The type that Tokyo wanted was “demand pull” inflation that results from accelerating GDP and rising wages.

Now as demand for the assets on which the BOJ is sitting drops, Japan’s central bank is awash in red ink. So is, sad to say, Tokyo’s poor report card for a lost decade for badly needed economic reforms.

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