The Bank of Japan (BoJ) is losing its war on deflation to stimulus hoarders.
It's two years since the central bank massively stepped up its campaign of printing yen to push up annual increases in consumer prices to 2 per cent. At the time, the BoJ hoped to achieve its target "in about two years". But with companies and consumers still refusing to spend, the anniversary is set to pass with inflation stuck at zero.
Japan's spending impulse has withered with its ageing population. Two decades of low or negative inflation has pushed up the real cost of capital even though nominal interest rates are at zero. Hoarding money or government bonds made more sense than investing in new factories. BoJ Governor Haruhiko Kuroda thought he could coax the Japanese to change their behaviour. By using money-printing to weaken the yen, he hoped that exporters' bumper profits would translate into higher domestic wages.
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That project has flopped. Japanese exporters have neither hired more full-time workers, nor lifted base wages appreciably. Though they did pay bigger annual bonuses, workers saved the windfall. Meanwhile, the government decided to mend its spendthrift ways by raising the sales tax rate. The stimulus went largely unspent.
Kuroda doesn't seem unduly perturbed. Inflation, he says, has fallen in recent months mainly because of plummeting oil prices, which will eventually boost consumption. Large manufacturers, though, are pessimistic about business conditions, a BoJ survey showed this week. Lawmaker Kozo Yamamoto, a key architect of Prime Minister Shinzo Abe's economic revival programme, told Reuters that further monetary easing is "absolutely essential".
The problem is that buying even more bonds will only exacerbate the BoJ's unhealthy dominance over markets without necessarily changing corporate behaviour. The central bank is already sucking up government bonds worth 80 trillion yen ($666 billion) a year. Companies are unlikely to step up investment as long as global demand remains anaemic.
One way out may be a stimulus that cannot be saved. For example, the central bank could give households vouchers that must be spent in a short period of time. For the central bank to dabble in "helicopter money" would be highly controversial. But to defeat the stimulus hoarders, Kuroda may need radical solutions.
