Most of the world is applauding the Bank of Japan’s dramatic announcement last week to double its balance sheet by the end of 2014 to pull itself out of its deflationary malaise. But that would not include most Chinese.
At this week’s Boao Forum for Asia, a Chinese government-backed conference of world government and business figures, Li Ruogu, chairman and president of The Export-Import Bank of China, and a former senior official at the People’s Bank of China, said the efficacy of quantitative easing (QE) is in doubt.
Japan’s intervention may just be cover for a “currency war”, Li warned, with the main intent to depreciate the yen at the expense of rival exporting nations, while also being likely to raise commodity prices and lead to more volatile exchange rates. He said that Shinzo Abe’s administration needs to consider the effect of Japanese monetary policy on other countries. “Japanese deflation is not the only issue,” he said, adding his worry that this will lead to inflation in China and make its commodity imports more expensive.
Li also worries about the risks of a poorly executed exit strategy or policy mistake associated with QE, which could result in Japan overshooting its 2% inflation target by a huge margin.
Most fundamentally, Li argued that QE is not addressing the reasons for Japan’s loss of industrial competitiveness: “This has suffered because of industrial policies, not because of monetary policy.”
Although Li does not represent China’s government in an official capacity, other officials at Boao have echoed his comments, some of which were met with enthusiastic applause from many Chinese people in the audience — particularly his suggestion that Japan’s QE policy was thrust upon it by the US for reasons of national security.
However, other participants at Boao threw their voices behind the Bank of Japan’s efforts. Toshiro Mutoh, chairman of Daiwa Institute of Research and a former deputy governor at BoJ, acknowledged the strategy has risks, including the possibility of fomenting asset bubbles, but that it was necessary — Japan has suffered from deflation for nearly two decades and nothing else has worked. He added the positive market response, in the form of a weaker yen and a surge in domestic stocks, showed the market is enthusiastic about the BoJ’s move.
He also noted that any exit strategy is years away, but acknowledged that Abe must do more in terms of pushing industrial restructuring.
Paul Sheard, chief global economist at Standard & Poor’s, said the action by new BoJ governor Hiroki Kuroda is a good start. Kuroda has learned that managing market and public expectations is important, and has done well to convince people that not only can the BoJ fight deflation, but that it can succeed. Kuroda’s predecessor, Masaaki Shirakawa, by arguing the BoJ lacked the tools to fight deflation, made it difficult for the central bank to be influential.
Sheard also claimed that, although the BoJ’s move is dramatic, it is still modest compared to the scale of monetary easing in the US and UK. The Federal Reserve has expanded its balance sheet by 252% since 2008, and the Bank of England’s has grown by 333%. Factoring in what Kuroda has announced for the next 18 months, the BoJ’s balance sheet will grow by “only” 166%.
Sheard said that if Kuroda’s gamble pays off, he will be known as the Japanese Paul Volcker, referring to the US Fed governor who beat stagflation by raising interest rates to 21% in 1980.
But Fred Hu, chairman of Primavera Capital, said Volcker’s monetary move was echoed by the deregulation unleashed by Ronald Reagan, including the weakening of labour unions and other measures that helped spur productivity, and a 30-year expansion. The Abe administration needs to embark on similar moves to complement the BoJ’s monetary strategy. Hu said the BoJ’s move is better than doing nothing, but investors will be expecting Abe to match Kuroda in terms of supporting words with action.