“Historic” is an overused word. But if the Bank of Japan meets expectations and embarks this week on a radical policy shift to crush deflation, the meeting will go down as, well, historic.
Because of gently falling prices, Japan has not grown in nominal terms for two decades, reducing its relevance for the global economy.
But all that could change if the BOJ’s new governor, Haruhiko Kuroda, shows he is indeed serious about hitting the central bank’s new inflation target of 2%.
“This is their best shot at reviving the economy,” said Jerry Webman, chief economist at OppenheimerFunds in New York.
“Even a modest improvement in the world’s third-largest economy is going to add ... to overall global growth.”
At a two-day rate review that ends on Thursday, the central bank is likely to start open-ended asset purchases immediately, rather than from 2014. The BOJ will also probably extend the maturity of the bonds it buys and set a new policy target focusing on the size of its balance sheet, sources familiar with the bank’s thinking told Reuters in Tokyo.
Japan badly needs nominal gross domestic product to start expanding again so that the government’s debt does not become unbearably large as a share of GDP. It is already dizzyingly high at 235% of annual output.
Rising prices also transmit signals about which sectors can most profitably deploy capital and labor. When deflation is entrenched, those market messages are muffled; stagnation sets in, as it has in Japan.
Despite the strong political mandate from Prime Minister Shinzo Abe, many doubt Kuroda will succeed in reflating the economy without more fundamental reforms such as injecting more competition into the economy and attracting more direct foreign investors - something Japan has shown little appetite for.
Even if his strategy does work, there could be a backlash from Japan’s growing legions of pensioners, who have no interest in seeing their wealth and fixed incomes eroded by inflation.
All told, the stakes for Japan are arguably greater than at any point in the last fifty years, according to James Malcolm, a foreign-exchange strategist with Deutsche Bank in London.
He said those expecting to be disappointed by Kuroda’s debut are themselves likely to be disappointed given the single-minded resolution to defeat inflation that Abe has shown since taking office in December.
“This is a product of the increasingly widely recognized failure of every other economic policy approach, presenting an opportunity that Abe has grabbed with both hands,” Malcolm, a long-time Japan watcher, told clients.
While Kuroda has Federal Reserve Chairman Ben Bernanke’s template for quantitative easing to follow, the BOJ chief’s commitment to end deflation ‘at any cost’ has echoes of European Central Bank President Mario Draghi’s vow to ‘do whatever it takes’ to preserve the euro.
The single currency has had another near-death experience over the terms of a rescue for Cyprus, and Draghi is sure to be quizzed about the deal’s implications for the euro zone at a news conference following an ECB policy meeting on Thursday.
In exchange for a bailout loan, the International Monetary Fund, the European Commission and the ECB wiped out Cyprus’s senior bond holders and imposed a levy on big depositors at the island’s two largest banks. Temporary capital controls are also in place.
These unprecedented steps could yet prove contagious, touching off a deposit flight from weak banks in more important economies that could cause the euro zone to disintegrate, pessimists fear.
Optimists retort that the ECB has slung a safety net under the euro by promising to buy struggling governments’ bonds as a last resort.
Where both camps agree is that Cyprus’s crisis will deal a fresh blow to confidence and further delay the euro zone’s recovery.
“Even without some sort of break-up or fragmentation, the economic outlook for the region is very poor given the fundamentals,” said Jonathan Loynes with Capital Economics, a London research outfit.
The ECB is unlikely to deliver fresh monetary stimulus, according to economists, even though figures on Tuesday are expected to show that unemployment in the 17 countries sharing the euro rose to a record 12% in February. In Spain and Greece, it has surged to around 25%.
Relief is unlikely any time soon, according to the International Confederation of Private Employment Agencies in Brussels, which represents 140,000 private firms around the world. Demand for agency jobs fluctuates roughly in time with changes in GDP and is a leading labour market indicator.
Denis Pennel, managing director of the group, said his members had lately been reporting weakness in Europe, with the biggest drop in demand in Italy and France. “We don’t expect any recovery before the last quarter of this year at the earliest,” he said.
Nor was business at job agencies in Japan looking up. “If you want to have signs of optimism, you should really look to the U.S.,” Pennel said. The confederation’s American members reported a 2.4% year-on-year rise in demand in March.
The Institute of Supply Management’s manufacturing survey and non-farm payroll figures, both for March, are the conventional U.S. data highlights of the week. Employers are likely to have added 200,000 jobs, down from an unexpectedly large 236,000 increase in February, according to economists polled by Reuters.
Webman with OppenheimerFunds acknowledged that there had been some recent softness in the economic news flow but drew comfort from evidence, notably in the fourth-quarter GDP report, that U.S. firms are starting to invest some of their huge cash holdings.
“The economy is growing decently, but it’s not really accelerating to any marked degree,” he concluded.