Japan’s central bank is China’s biggest cheerleader

column-william pesek-bloomberg viewBank of Japan (BOJ) Governor Haruhiko Kuroda has a new strategy to support his country’s listing economy: talking up China’s.

It’s a marked break with what other Japanese officials are saying. Finance Minister Taro Aso and economy czar Akira Amari have been eager to blame China’s slowdown for Japan’s woes. It’s somewhat surreal to see them urge Beijing to implement economic reforms when they’ve done nothing of the sort in Tokyo—and with more time on the job than their Chinese counterparts.

Kuroda, however, is guilty of taking things to the opposite extreme. Speaking in New York, he challenged the negativity shrouding Asia’s biggest economy, saying he’s “reasonably sure” China will grow between 6 percent and 7 percent this year and next—a prediction that hardly anyone else has endorsed. Kuroda has effectively lashed his credibility, and his legacy, to China’s trajectory. It’s not hard to understand why he might have felt he had no choice.

Kuroda has to contend with three big problems. The first is demographics. Just as his predecessor Masaaki Shirakawa warned, Japan’s consumer prices are bound to fall as its population ages. The second is a dearth of confidence: Monetary policy has been rendered comatose by the public’s hesitance to borrow and banks’ hesitance to lend. The third is China’s slowdown—a variable far beyond Tokyo’s control, but no less critical for Japan’s fate.

Prime Minister Shinzo Abe’s revival program has three parts—monetary stimulus, fiscal spending and deregulation—but China’s boom has always been the unofficial fourth. Until now, that is. China’s outlook is deteriorating faster than most investors expected, causing an existential crisis for Abenomics.

The world needs to regain some perspective on China. As Nicholas Lardy of the Peterson Institute wrote in the New York Times, the data on China’s economic fundamentals—growth in wages, non-agriculture job growth, disposable income and household expenditures—belie the ongoing meltdown hysteria. Naysayers, Lardy says, are making the mistake of interpreting China’s data through the lens of its industrial sector. Yes, China’s electricity rates are plummeting. But that’s only because China is shifting to a services-based economy that’s less power-intensive than steel production or garment manufacturing.

The fact that China isn’t crashing should put most of the world at ease. But even a moderate slowdown could prove a lethal blow for Japan. China’s combination of deflation and currency devaluation is reducing the odds that the trillions of dollars of monetary stimulus Kuroda has pumped into markets since April 2013 will ever gain any traction.

The yen’s 22-percent drop since Kuroda unleashed his quantitative-easing (QE) experiment pumped up profits at Toyota and Sony and fueled a rally in the Nikkei. It has failed, though, to encourage executives to increase wages or invest in new businesses.

Arguments for another dose of QE must be weighed against the costs. Rather than make Japan more resilient and competitive, Tokyo’s weak-yen policy is increasing its dependence on exports—in other words, China—at the very worst time. The $5 trillion of wealth that Shanghai-listed equities have erased since June is already more than Japan’s annual output.

The better solution would be for Aso and Amari to stop bellyaching and get to work. If they’d spent the last 975 days loosening labor markets, building a progrowth-tax system, encouraging innovation and lowering trade tariffs, they wouldn’t be so shaken by a spell of bad economic news in Beijing or tumbling stocks in Shanghai.

It stands to reason Kuroda is doing—and saying—everything he can to pierce the negativity fogging China. After all, a stable and vibrant China would do more for Japan than another QE jolt. Kuroda’s happy talk about China goes hand-in-hand with his insistence, contrary to all evidence, that Japan is on pace to meet its 2-percent inflation target, and BOJ officials’ excuse-making about how weak oil prices are to blame for their policy failures. But these kinds of statements pose risks of their own; if they prove to be illusory, they will put a serious dent in the BOJ’s credibility.

The simple fact is that, unless Japan tends to its own problems, it will inevitably get dragged ever deeper into China’s. And in that case, Japan’s leaders will have no one to blame but themselves.


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