BNY Mellon: Japan – Diminished Returns

BNY Mellon: Japan – Diminished Returns

Japan
Japan Tokyo.jpg

• Odds on the BoJ easing again are shortening

• The sales tax hike will test the nation's mettle

• Prospects of any game-changer are limited

The prospects of the Bank of Japan returning to the drawing board on monetary policy have been increasing with each and every data release. But doubts that policy can really make a difference are justified.

The Tankan survey showed that business sentiment slumped to a six-year low in Q3 – the product of a slowing global economy and an over-dependence on exports. But policymakers would be forgiven for being just as concerned about a brake on demand of their own making – a hike in the sales tax to 10%.

The government has gone to some lengths to mitigate the impact of the hike on the consumer with the use of various rebates on certain goods. It may work; but the caution is down to the shudder the very mention of the tax sends down the average retailer’s spine.

Indeed, Japan has a curious sensitivity to modest increments in its tax burden. When the sales tax was hiked in 1997 by the Hashimoto government, consumer spending fell sharply (before the economy was then consumed by the Asian crisis); and the experience led to much trepidation ahead of the planned sales tax hike in 2014. Concerns were certainly prescient as Abenomics lost its luster, never to fully recover.

The next BoJ policy meeting concludes at the end of this month with the consensus shifting towards fresh easing, and the prospect will be all the greater if the opportunity cost of holding USDs in JPY terms has risen in the meantime.

Despite this, it is clear that in terms of belief in its ability to boost domestic demand, the BoJ and its board remains caught in two minds. But for Prime Minister Shinzo Abe, equivocation could be considered something of a luxury given that his legacy is on the line.

Certainly, Abe was keen to emphasize last week that ‘we will take all possible steps flexibly and without hesitation to ensure the economy is on a growth path’.

Yet the PM can hardly be unsympathetic to those who have come to doubt the efficacy of monetary and fiscal policy.

Public debt stands at more than 200% of GDP; inflation – and expectations thereof – have long since stagnated. And all the way back in 2016 – after the ill-starred introduction of the negative deposit rate – many felt that Abenomics had arrived in the last chance saloon.

The ‘Krugmanite' principle behind Abenomics was that prior pump-priming endeavors were largely compromised by limited scale: hence, deliver a big enough boost – so the argument went - and ample inflation would engineer a suitably negative real interest rate to steer Japan back on to the path toward equilibrium.

But for Japan, the experience has been rather different. And certainly, in a country where population dynamics alone are the source of significant problems and distortions, the shortcomings of implementing stimulus without reform are plain to see.

The BoJ and Finance Ministry must certainly combine to fend off untoward JPY strength, but whether there is genuine hope that policy can make a difference otherwise is unclear.

In truth, it is tempting to conclude that the requisite scale of stimuli to jolt the Japanese economy back to life only materialized after doubts about policy initiatives became too deeply ingrained on the nation’s psyche.