Bank of Japan Governor Kazuo Ueda.
Kazuhiro NOGI / AFP via Getty Images
Central bankers are supposed to yank away the punchbowl just as the party gets going. In 1999, the Bank of Japan rewrote that maxim entirely — putting out the biggest punchbowl any major economy had ever seen and leaving it out indefinitely.
Japan wasn’t exactly partying when it became the first G-7 member to cut rates to zero 27 years ago. Nor did great merrymaking surround its 2001 move to pioneer quantitative easing. The BOJ’s real innovation, though, was leaving the bar open year after year, decade after decade.
When Haruhiko Kuroda arrived as governor in 2013, he turned the taps up higher still. The BOJ cornered the government bond market, hoarding more than half of all outstanding issues, and became the largest owner of Japanese stocks via exchange-traded funds. By 2018, its balance sheet had surpassed the size of Japan’s $4.2 trillion economy — another G-7 first.
Talk about a hangover. The current BOJ board, headed by Governor Kazuo Ueda, has been nursing it ever since. This week, policymakers hiked the benchmark rate to a 31-year high of 1%. In the same breath, they announced plans to slow the tapering of JGB holdings next year — a sign they believe the bond market isn’t ready for last call.
Also, with the Nikkei 225 Stock Average roaring to all-time highs above 71,000, the BOJ is loath to get in the way. Even though lots of the runup is driven by the “AI trade,” the last thing any BOJ team wants is to be blamed for ending a bull run in Japanese shares.
So, the Tokyo punchbowl is still out and serving. That’s remarkable given that every economy that copied the BOJ’s quantitative easing playbook after the 2008-2009 financial crisis — the U.S., the Eurozone, the U.K., Australia — had normalized rates within a few years. Japan never did.
The pressure to stop hiking is growing. Japanese Prime Minister Sanae Takaichi’s economic strategy depends on ultralow rates and a weak yen, and her government has made clear that tighter policies are a headwind that an economy expected to grow just 0.5% this year can ill afford. Before taking power last October, Takaichi called the idea that Japan needs higher rates “stupid.” The BOJ hiked anyway on Tuesday — but carefully, and with one eye on the exit.
Japan’s predicament has a cinematic analogue: Thomas Vinterberg’s 2020 film “Another Round,” in which four middle-aged teachers experiment with maintaining a permanent low-grade buzz. It doesn’t end well.
Neither has Japan’s. Twenty-seven years of unlimited monetary support didn’t awaken the economy’s animal spirits — it numbed them. Rather than use cheap money as cover to cut bureaucracy, open labor markets, and close the gender pay gap, successive governments since the late 1990s simply demanded more liquidity. The BOJ obliged. Structural reform never came.
Those who counter that this argument gives short shrift to improvements in corporate governance have a point. Fair enough, as stocks skyrocket. But Japan is proving anew that trickle-down economics doesn’t work. Real wages have now fallen for four straight years.
The bill is arriving. Japan has amassed the developed world’s largest debt burden — around 260% of GDP — and 10-year JGB yields have climbed to levels last seen in 1999. Against that backdrop, Takaichi is pressing the BOJ to hold the line, even as its internal inflation gauge runs at 2.8% year-on-year — 5.6 times the rate of economic growth. Yet another round is exactly what she’s ordering.
This augurs poorly for yen bulls. The currency sits at around 161 to the dollar, down roughly 2.8% year to date. Officially, Tokyo wants it to stop falling. Last month, the Ministry of Finance spent at least $74 billion trying to stabilize the exchange rate. There’s a strong argument that those efforts are purely performative.
Tokyo knows that nothing would put Japan in President Donald Trump’s crosshairs faster than the perception that it’s engineering a weak yen to boost exports. Treasury Secretary Scott Bessent has been vocal about prodding the BOJ to keep hiking. The logic appears to be: if Trump can’t push the Federal Reserve to ease, the U.S. can at least get Japan to tighten. Tokyo wants to appear to be fighting a weak yen, while welcoming it in private.
Yet that exposes the central paradox. Japan is experiencing stagflation. Ueda’s BOJ must now choose: stage an intervention and cut the government off, or keep enabling an addiction to free money. The drinks cabinet is open. The question is who blinks first.
AloJapan.com