Three years since Bank of Japan (BOJ) Gov. Haruhiko Kuroda introduced quantitative and qualitative monetary easing (QQE) to pull Japan out of deflation, his initial goal of a 2-percent inflation rate is more difficult to attain as a result of continued low consumer spending and low oil prices. Prime Minister Shinzo Abe's economic policy mix, "Abenomics," which has depended heavily on monetary easing, stands at a crossroads, as the Japanese economy is in desperate need of policies that will prop it up.
At a March 16 meeting between the Japanese government and Joseph Stiglitz, a world-renowned economist and professor at Columbia University, Kuroda expressed puzzlement. "It's very strange," he said. "Corporate earnings are high and the labor market is tight, but the rate of wage increase is slow." The BOJ had initially raised hopes among corporations and consumers of a weaker yen and high stock prices through the adoption of quantitative and qualitative monetary easing "of a different dimension," but most of what followed -- April 4 marks the three-year anniversary of the BOJ's implementation of QQE -- turned out to have been misjudged.
The objective of QQE was for the BOJ to put a time limit on deflation and flood the market with capital, in order to encourage corporations and households to increase investments and consumption before prices went up, while improving corporate performance through a weak yen and high share prices. Indeed, many major corporations marked record earnings due to the effects of the weak yen.
However, such positive effects only lasted a year. The BOJ's first major error in judgment came after the April 2014 increase in the consumption tax rate from 5 percent to 8 percent, in the form of a long-lasting dip in consumer spending and falling oil prices from that summer onward. The inflation rate peaked in April, but quickly declined. Following additional monetary easing in October 2014, and since the summer of 2015 when concern over the slowdown of China's economic growth spread, unrest in financial markets extended worldwide. Since January of this year, Japan flipped back to a strong yen and low share prices, depressing business and consumer sentiment.
The BOJ maintains that monetary easing has had a positive impact, pointing to prices rising by about 1 percent with the exception of the energy industry. But this state of affairs may become the very stumbling blocks in bailing the country out of its deflationary state. A weak yen since 2013 has raised prices of imported goods and therefore food products, hitting consumers' pocketbooks. Consumer spending plummeted, resulting in negative economic growth in the October to December term in 2015. A senior BOJ official lamented, "Neither consumers nor companies have yet to adapt to inflation."
Increasing prices without a sustained raise in wages will only overwhelm consumers, and increase anti-QQE voices among politicians. Kuroda attended a spate of meetings held by business organizations and labor unions in January, calling for wage increases, with no holds barred. However, his admonitions were rendered insignificant amid fears over the future of the world economy. In Japan's annual spring wage negotiations, the average wage increase at major corporations was smaller than that of the previous year, indicating a slowdown in wage improvements.
The effects of the BOJ's "surprise" tactics -- in which monetary easing was implemented at a time and in a scope different from those predicted by the market -- are growing increasingly dubious. When in late January the BOJ announced its plan to institute negative interest rates, it resulted in a weaker yen and higher share prices, but that lasted only two days. Kuroda has indicated his willingness to introduce additional monetary easing, if needed, to achieve the target inflation rate, but the powers of monetary easing are showing signs of decline.
The "approximately two years" that the BOJ initially set as a time frame for its inflation goals has seen a series of postponements, with the deadline now pushed back two years to the first half of fiscal 2017. There is talk that another postponement may be decided upon at the BOJ monetary policy meeting set to take place April 27 and 28. This means that price goals may not even be reached while Kuroda, whose remaining time as governor of the BOJ is now less than two years, is at his post.
Meanwhile, concerns over the limitations and unwanted side effects of quantitative and qualitative easing are growing in financial markets and elsewhere.
The negative interest rate strategy deployed by the BOJ in February aimed to lower the interest on mortgages and other loans, thereby promoting investments and consumer spending. With the BOJ in possession of over 30 percent of outstanding government bonds, and the additional purchase of government bonds becoming increasingly difficult, the BOJ is now able to turn to yet additional monetary easing in the form of further raising negative interest rates. However, for banks, negative interest rates can hurt earnings. They can find themselves unable to take on the risks of lending to corporations, generating concerns of credit crunches. At BOJ monetary policy meetings, more officials are arguing that beefing up monetary easing policies will result in more unwanted side effects than hoped-for results.
Abenomics was supposed to bring the nation out from its deflation pit through its "three arrows," including its growth strategy and its fiscal policy. But Abenomics is quickly running out of steam, as the administration and the BOJ pushed forth with fiscal policy without instituting a significant growth strategy -- such as deregulation -- alongside it. At the G20 Finance Ministers and Central Bank Governors Meeting held in February, the participating states released a statement saying "monetary policy alone cannot lead to balanced growth."
At a hearing in late March, Nobel Prize-winning economist and Princeton University professor emeritus Paul Krugman told the Japanese government that Abenomics places too much of an emphasis on fiscal policy. Even within the BOJ, there are growing demands that the government use its growth strategy to pull Japan out of its deflationary spiral, and that unless corporations and consumers feel that the Japanese economy will continue to grow, it is inevitable for them to remain wary toward wage increases and investments.
Ahead of the G7 Ise-Shima Summit set to take place in May, Prime Minister Abe is rushing to draw up economic measures that will raise consumer demand. It is also expected that the possible postponement of the next consumption tax hike, currently scheduled for April 2017, will be deliberated.
If such decisions are made and implemented to little success, further aggravating public finances, there is a risk of interest rates -- which have been suppressed by monetary easing -- to shift upward, taking the economy down.
Three years since its quantitative and qualitative easing, the government and the BOJ have yet to come up with a definitive strategy to stop Japan's continued deflation.