The Bank of Japan is bucking a trend among central banks by rejecting additional monetary stimulus in the face of the cooling global economy.
The Japanese central bank says more monetary juice simply isn’t needed right now as a burst of post-tsunami reconstruction spending boosts a domestic economy that has sputtered for two decades.
Thursday’s announcement surprised many analysts because Japan would seem like the perfect candidate for more easing. The high yen and the darkening outlook in Europe and elsewhere has hammered Japan’s export-dependent economy and plunged the country into an uncharacteristic trade deficit.
“The balance of domestic and external demand has shifted,” Bank of Japan governor Masaaki Shirakawa acknowledged after the announcement. Yes, external demand is weaker, but domestic demand is picking up the slack, he said.
In fact, Mr. Shirakawa expects Japan to outperform most of its Group of Seven peers this year. In a new forecast released Thursday, the bank said the economy would grow 2.2 per cent this year.
That’s better than the two per cent growth expected in Canada and the U.S. this year. Much of Europe is in recession.
In recent weeks, the People’s Bank of China, the European Central Bank and the Bank of Korea have all moved to stimulate their economies.
But analysts warned not to read too much into the Bank of Japan’s non-decision, or its forecast.
Japan’s economy remains deeply troubled 20 years after a massive credit bubble burst, leaving the country’s banking system in shambles. Consumer and corporate spending remains extremely weak and fragile.
The burst of infrastructure spending in tsunami-ravaged areas is good in the short-term. But longer term, the March, 2011, disaster, which killed more than 19,000 and temporarily shut down the country’s nuclear reactors, will have profoundly negative consequences for Japan, argued Drummond Brodeur, portfolio manager and global strategist at Signature Global Advisors in Toronto.
“The long-term damage from the earthquake is much more significant,” Mr. Brodeur explained. “It’s really going to accelerate the de-industrialization, the offshoring and the flow of investment outside the country.”
Manufacturers are facing the prospect of sharply higher energy bills as nuclear power is replaced with electricity generated from expensive imported fuel. And there’s the ever-present threat of more earthquakes, which is prompting customers to demand alternative sources of supply for key components, particularly in the auto and electronics industries.
“Japan has a shrinking work force. There’s no net immigration. It will continue to be a museum,” Mr. Brodeur pointed out.
Many Japanese companies aren’t responding fast enough, choosing to hoard cash rather than accelerate overseas investment, he suggested.
The country has moved painfully slow to fix its banking system after a massive credit bust in the early 1990s. With the lending system in tatters, the government has filled the gap, with successive waves of stimulus spending. The result is a world-beating government debt-to-GDP ratio of more than 225 per cent – more than three times Canada’s.
“Japan’s problem is that it’s been a very expensive country, that’s lived very well,” argued Dan Ciuriak, former deputy chief economist at Canada’s Department of Foreign Affairs and International Trade and now a consultant. “But it’s not a good place to do business.”
Many economists draw parallels between Japan and other heavily indebted countries, suffering the after-effects of burst credit bubbles, such as the United States and many European countries.
Japan had been able to manage its debt because it consistently runs a large current account surplus – the broadest measure of trade and investment flows, Mr. Ciuriak suggested. And unlike many other heavily indebted countries, the bulk of what it owes is to ordinary Japanese citizens, through the public pension system or deposits at the government-run postal service.
“The Japanese basically owe the debt to themselves,” Mr. Ciuriak said.
How long Japan can comfortably take on more debt to keep its economy growing is a perennial question.
“That’s got to be a temporary measure, not a 20-year measure, as it’s been in Japan,” Mr. Brodeur said.