Japan Has Raised Inflation but Can’t Shake Stagnation

TOKYO—Bank of Japan Gov. Haruhiko Kuroda is ending a decade at the helm of the nation’s central bank. His departure draws a line under his bold initiative to rid the nation of deflationary pressures that have been blamed for the economy’s lackluster performance ever since the collapse of the now infamous “bubble economy” in 1990. As he leaves, he can point to some successes, but even the typically upbeat Kuroda isn’t claiming victory.

TOKYO—Bank of Japan Gov. Haruhiko Kuroda is ending a decade at the helm of the nation’s central bank. His departure draws a line under his bold initiative to rid the nation of deflationary pressures that have been blamed for the economy’s lackluster performance ever since the collapse of the now infamous “bubble economy” in 1990. As he leaves, he can point to some successes, but even the typically upbeat Kuroda isn’t claiming victory.

When he took office in 2013, appointed by then-newly elected Prime Minister Shinzo Abe, Kuroda beamed confidence. The Bank of Japan (BOJ), he declared, would double its assets over the next two years, pushing a flood of money into the economy that would create a 2 percent inflation rate—something the government ardently wanted in order to get a stagnant economy moving. A decade later, Kuroda has hit his target, although it took COVID-19, a global supply chain crisis, and the Russian invasion of Ukraine to get there. Consumer prices are rising at a 4 percent annual level, the highest since the oil shock year of 1981. But economists also see the figure as the peak, as global commodity prices level off or decline.

The open question is whether this will lead to what Kuroda calls a “virtuous cycle,” in which workers facing higher prices are able to win higher wages after two decades of almost no wage growth. Japan’s annual labor union wage negotiations are expected to produce a wage increase of just under 4 percent this spring, according to Goldman Sachs. That would be the highest since 1992 but barely enough to keep even with inflation. In addition, smaller companies, which have much lower levels of profitability, are not expected to go along. Even Kuroda does not see the current situation as meeting the central bank’s goal of a “demand-led” cycle of inflation that will benefit workers. “It’s regrettable that [the country] is not in a situation in which the price target can be attained in a sustainable way,” he said in January.

At the same time, the negative interest rate policy he employed to help spread liquidity through the banking system now leaves the BOJ with a bloated balance sheet. The BOJ now owns more than half of all outstanding Japanese government bonds. This is more than five times the level of the pre-Kuroda era and represents the size of Japan’s entire annual economic output as measured by its GDP. Despite its vigorous insistence that it is “monetizing” the debt, the central bank has also in effect bankrolled the continued spending deficits of the national government, in which 30-50 percent of all spending at the national level each year is underwritten by new debt.

Unraveling this situation without causing a panic in the financial markets now falls to Kuroda’s successor Kazuo Ueda, a former BOJ policy board member and an academic seen by analysts as more of the old-school breed of senior BOJ figures.

Other bankers don’t see Ueda as a huge fan of the Kuroda experiment, but he is still expected to unwind things slowly and to avoid a sudden market spike in interest rates that could convulse the economy. Ever since its 1990 fall from grace, Japan has plugged along at a modest growth of around 0.5-1.5 percent per year. While hardly eye-popping, it has been enough to keep the country prosperous, even though its relative wealth has fallen sharply as the rest of Asia catches up. Most notable, of course, is China. Its GDP didn’t exceed Japan’s until 2010, despite a population more than 10 times larger; but Beijing then raced ahead. The Chinese economy is now 3.5 times larger than Japan’s.

Ueda’s first task, therefore, will be to cure the economy while maintain an economist’s version of Hippocrates’s “do no harm.” The risks are evident, leading some to call the BOJ job a poisoned chalice (according to Japanese media, Kishida’s first choice turned it down). The central banks’ target for the benchmark 10-year Japanese government bond has been a yield of zero percent—a return that is obviously unattractive to most investors. As a result, the BOJ has been the buyer of last resort. With Kuroda’s departure and a recently changed target range for the 10-year bond of up to 0.50 percent, the market has started to test the BOJ’s resolve. In recent weeks the central bank made its largest-ever bond purchase, of 12 trillion yen ($90 billion) in just four business days.

What exactly Ueda will do has become fodder for extensive analysis among economists, traders, and BOJ watchers—particularly because of his 2012 paper looking at the BOJ’s “quantitative easing” policy. In Ueda’s confirmation hearings in parliament, he confirmed the general view that the ever-cautious BOJ will not want to signal a full reversal, but will move gradually, loosening the bands that tie while heading off any sharp market swings by dipping into the market with new purchases when necessary.

All of this revolves around tenths of a point in interest rates. Even before Kuroda’s negative-rate policy, Japan had a “zero-rate” policy; and even before that Japanese debt was always among the lowest yielding in the world. The 10-year bond last surpassed the 2 percent threshold in 1998. Takahide Kiuchi, executive economist at the Nomura Research Institute and a former BOJ official, reckoned that even without the BOJ’s constant buying, the market would likely settle with the 10-year bond at a rate of around 0.8 percent. This would hardly be a disaster for the market, the financial system, or the Japanese economy.

The longer-term scenario is not so rosy. Any economist will point out that a government cannot keep piling up new debts forever, and indeed countless economists have made this point in relation to Japan’s record-high debt level, now somewhere around 250 percent of GDP and growing.

The question no one has been able to answer is when “forever” actually arrives. Some foreign analysts have predicted disaster for many years, while Japanese economists (who are part of the system and perhaps too sanguine) suggest it could be between 10 and 30 years, while some notable global economists have just given up trying to guess.

So what did Kuroda achieve with this unprecedented asset purchase program? On balance, not all that much. “There is no evidence that the country’s monetary policy over the last 10 years caused a positive impact on the trend of the economy and prices,” Kiuchi contended. The trajectory of Japan’s economic growth was little changed, and Kuroda’s dream of a virtuous cycle of higher prices leading to higher incomes and expanded company and individual wealth remained unfulfilled.

One concern about Kuroda’s experiment was that it stretched inexorably from the initially planned two years to a full decade. According to Martin Schulz, chief policy economist for the electronics group Fujitsu, this resulted in the government, stock market, real estate industry, and corporations all dependent on the idea of virtually free money on tap. “The longer this type of extreme policy lasts, the more difficult the resolution becomes,” he said.

The collapse of the U.S. Silicon Valley Bank due to higher interest rates may seem a far cry from Japan’s well-heeled megabanks, but banking collapses are seldom telegraphed in advance. Japan learned this in the sudden 1998 fall of the Long-Term Credit Bank of Japan, which less than a decade earlier had been one of the 10 biggest banks in the world.

But the Kuroda decade was far from a complete failure. The central bank’s policies did help push down the Japanese yen from punishing levels that had undercut exports and lowered the value of increasingly important profits from abroad. In addition, it helped to bankroll the “Abenomics” program. Nominal GDP grew, while labor participation rose, especially among women; and massive subsidies for the previously sheltered agriculture sector were cut.

The problem, most economists agree, is that the answer to Japan’s economic torpor lies in strong governmental policies to raise productivity and create higher growth—not in monetary easing by the central bank.

“Higher prices are not the solution to Japan’s economic problems,” Kiuchi said. “Only an increase in productivity and the growth rate will solve the problems we are facing, but it is not the business of the Bank of Japan; it is the business of the Japanese government.” Incoming BOJ governor, Ueda, will no doubt agree.