Japan’s central bank once again tried a series of clever policy changes this week. It pledged to target the ten-year Japanese government bond yield. It also upended conventional wisdom — and the meaning of words — by making its inflation target something it wants to overshoot as a matter of course.
Haruhiko Kuroda, the governor of the Bank of Japan, has overseen the most rampant balance sheet expansion in memory. Japan’s central bank now owns more than a third of the JGB market, and is buying ¥80 trillion ($789 billion) more every year. It buys ¥6 trillion worth of exchange-trade funds a year, and ¥90 billion of Japanese Reits.
These are all eye-popping measures even before you consider the fact the BoJ has imposed negative interest rates. Rates are so low in Japan that the central bank got a lot of attention this week for promising to push up 10 year yields — all the way to 0%.
But none of this is working.
Kuroda, love him or hate him, has tried almost every tool available. But monetary policy cannot solve all of a country’s woes. It is high time for Shinzo Abe, Japan’s prime minister, to put his money where his mouth is and unleash the almost-mythical ‘third arrow’ — structural reform.
This is not going to be easy. Japanese permanent workers will push back against changes to their contracts, leaving the country’s bloated temporary workforce stuck in limbo. Absurdly-long maternity leave packages will be tough to change without a push back from those women who already have jobs. Company bosses are unlikely to welcome any shake-up that will lead to an increase in their wage bills.
But if anyone can pull off labour market reforms, it is Abe.
Abe and his party have now won three elections since 2012, including a snap poll that he called two years after being elected. He is the longest-serving prime minister in decades. He has, in a word, built up a huge stock of political capital.
But for whatever reason, Abe appears timid about exhausting that political capital. There is already talk in the Japanese press about him calling yet another election. He constantly returns to voters, like a teenager on his first day, asking them: ‘Do you really like me?’
The voters do like him. But that is in large part because they have bought into Abe’s argument that he can turn the economy around. He has left that task to the central bank for the last six years, making plenty of speeches but pushing through little in terms of policy.
He now needs to take the fight into his own hands. Japan needs labour reform to boost productivity, bring more women into the workplace, and push up the spending power of consumers. None of this can be imposed by the monetary policy committee.
Shinzo Abe told a group of investors in New York this week that he was indeed planning labour market reforms. But he has said the same thing many times before.
Abe has had enough time to plan. It’s time to do something.