Japan’s Not Back Yet

(Bloomberg Opinion) -- Haruhiko Kuroda may rue the day he visited Nagoya.

In a Nov. 5 speech to business leaders in the city, the Bank of Japan governor came close to declaring the end of deflation and the dawn of a new era. The implication was that interest rates may no longer be geared toward combating something that no longer exists. There was a whiff of normalization.

Events have caught up with Kuroda and his upbeat comments look premature, at best, and like a misreading of the economic cycle. He's likely to spend at least part of next week's policy meeting and press conference, the first of the year for the world's major central banks, walking back his Nagoya exuberance.

Kuroda's prospective Houdini act reflects disappointing Japanese data and a changed international landscape. In that sense, the BOJ is emblematic of how the global dynamics have shifted: With the expansion slowing, any central bank that hasn't already begun to tighten can forget it. That was true, even in October as I wrote here, let alone November. Even more so now.

And those that have been tightening or unwinding stimulus are going to find it tough to go much further. The Federal Reserve has signaled loudly it's in pause mode, and European Central Bank President Mario Draghi confirmed the end of quantitative easing through gritted teeth. It should have been Draghi's victory lap.

The People's Bank of China, which isn't independent like its siblings, is nevertheless instructive on this point. Late last year, the PBOC said policy would be “prudent” but dropped the word “neutral” from its verbiage, implying officials are prepared to do more to spur the economy. Growth is cooling and inflation is dissipating, as it is in most major economies.

Japan's plight is far from dire: The jobless rate is 2.5 percent and has been steadily declining for the past decade, reflecting at least in part a dwindling population. Employers and workers don't have the visceral fear of automation and robotics that exists in the West.

Yet while prices are off the floor, they're no longer edging toward the 2 percent target. Though wages are up, household spending fell for eight months last year.

The recovery from the lost decades is incomplete and, critically for the BOJ, may be edging in the wrong direction. The increase in consumption tax planned for this year is another risk. A prior hike in the levy was blamed for a recession in 2014.

I've been upbeat on Japan the past few years, so this column is a bit painful. All isn't lost, but the window for taking at least some formal step toward winding down crisis era — or crisis decades — policy has probably closed. Such a step, if it were to happen, was likely to be very modest in any event. It's even plausible that the BOJ eases further by expanding its purchases of exchange-traded funds, according to Evercore ISI. 

The idea of Japan shifting to restrict, rather than juice activity, once seemed unlikely and now seems fanciful. Extraordinary accommodation was still going to be the norm — perhaps just a tad less of it. It would have been an important marker and a riposte to those who think of Japan as a stagnant society doomed to irrelevance. 

The last thing the world needs are dogmatic central bankers determined to pursue a pre-set course when circumstances change. Japan is no exception. In a column after Kuroda's Nagoya speech, I said he would watch two things: the world outside Japan and his now deceased predecessor Masaru Hayami.

Hayami's determination in 2000 to raise interest rates steered right into the path of a global cycle poised for a downturn. One legacy of that error was his heirs became much more cautious.

Kuroda would do well to heed that lesson.

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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