Japan’s Peter Pan problem

column-william pesek-bloomberg viewTHERE are plenty of people in Asia who believe Haruhiko Kuroda, governor of the Bank of Japan (BOJ), lives in Neverland. At the very least, economists on both sides of Japan’s deflation debate—those who worry Kuroda has weakened the yen too much, and those who believe he hasn’t done enough—think his policies have been out of touch.

But it was still surprising to hear Kuroda admit on Wednesday that his policies are guided by imagination—specifically, the Japanese public’s willingness to imagine they’re working. “I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it,’” he said  at a BOJ-hosted conference.

I’ll admit it’s somewhat distressing when the central banker managing the currency in which you’re paid suggests he’s relying on children’s stories for guidance. But Kuroda’s quote merits close scrutiny: It speaks volumes about why his policy of setting ultralow interest rates has failed to gain traction.

Some might say Peter Pan, a boy who never grows old on the small island of Neverland, is the wrong metaphor for Japan, where 26 percent of the country’s 127 million citizens are over 65, and aging fast. A better reference, one could argue, is Alice in Wonderland, since Kuroda’s low interest rates have created a world where investors increasingly find it difficult to distinguish between illusion and reality.

But in other ways, Peter Pan is an entirely apt metaphor. Just like young Peter, Kuroda’s quantitative easing program has never grown up; what was supposed to be a temporary policy increasingly seems like a permanent one.

Granted, this isn’t entirely his fault. The BOJ’s job would be much easier if Prime Minister Shinzo Abe carried out his promises of structural reform.

But as much as central banking is a matter of liquidity, it’s also a confidence game. Just as theater directors are supposed to compel audiences to suspend their disbelief, Kuroda’s responsibility is to set monetary policy in a way that gives the public a feeling of hope about the economy—and induces them to increase spending.

It’s on this emotional level that Kuroda is failing. Investors, particularly those overseas, seem to feel optimistic about low interest rates: They’ve driven the Nikkei up 36 percent over the last 12 months. But Japanese consumers don’t feel the magic and aren’t spending—inflation still hasn’t approached the BOJ’s desired 2-percent target.

This is where Kuroda penchant for space metaphors becomes relevant.  “In order to escape from deflationary equilibrium, tremendous velocity is needed, just like when a spacecraft moves away from Earth’s strong gravitation,” he said in February. “It requires greater power than that of a satellite that moves in a stable orbit.”

Unless Tokyo acts faster to lift living standards, Japan will never achieve Kuroda’s desired escape velocity.  My advice would be for Kuroda to talk less to the Japanese masses, and try to work some magic with Abe’s government. Until the government does its part by loosening labor markets, lowering trade barriers and creating tax incentives to support entrepreneurship, Kuroda’s yen printing won’t save the day.

In the meantime, the behavior of the Japanese public will be the best gauge of whether the government is doing enough to lift the country from two decades of stagnation. For now, it’s obvious that they don’t believe the national economy is capable of taking flight. And fanciful stories from public officials won’t convince them otherwise.


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