Sometimes $5 Trillion Isn’t Enough To Prove Einstein Wrong

It’s tantalizing to ponder what Albert Einstein might make of today’s Bank of Japan. Not through the lens of the Nobel laureate’s theory of relativity, but his definition of insanity.

Since 1999, the BOJ has been doing the same things to jolt the economy over and over again. But since 2013, Governor Haruhiko Kuroda has, as per the Einstein principle, really gone off the deep end.

It’s not what Kuroda did to defeat deflation, but the scale of his efforts. From 1999 to 2012, his predecessors cut interest rates to zero, pioneered quantitative easing, drove the yen sharply lower and pumped tidal waves of liquidity into assets everywhere.

Over the last nine years, especially, the BOJ ramped up government bond buying to the point where it owned more than half of all outstanding issues. Kuroda cornered the stock market via exchange-traded funds. The BOJ now owns more than $430 billion of equities, making it the biggest player in Japan’s market.

Crazy, indeed, to consider the BOJ’s balance sheet has long since topped the size of Japan’s $5 trillion of annual gross domestic product. No other Group of Seven economy even comes close.

And no economy has gotten so little out of so much financial firepower. Sure, Japan has muddled along and avoided a Lehman Brothers-like crisis. But 23 years of zero rates haven’t produced significant wage gains for Japanese workers. They haven’t rekindled innovation or increased productivity.

Two decades of the most aggressive corporate welfare the world has arguably ever known is backfiring as we speak. Think about it: how many headline-grabbing takeover attempts by multinational companies have you read about in Japan this last decade?

Here you have Tokyo reportedly raising its corporate governance game in that time to give shareholders, in theory, greater say over management. You also have a yen that’s been edging lower for a decade now—down 18% this year alone. Japan Inc. also is infamously cash rich.

If there’s a G7 economy that’s “on sale” in 2022 it’s the one Prime Minister Fumio Kishida pledges to internationalize. And yet huge cross-border mergers-and-acquisition deals have largely steered clear of Japan.

Here, the BOJ deserves more blame than Kuroda’s team would ever admit. The more cash the BOJ foisted at companies, the less urgency CEOs felt to innovate, restructure, increase efficiency or take risks on new business lines.

Why, in change-averse Japan, would chieftains bother with disruption when the BOJ’s punchbowl is overflowing with stimulants 24/7, no strings attached? Why, if you are an elected official facing voters every couple of years, would you bother remaking an economy getting monetary intravenous doses indefinitely?

By hitting the accelerator at every turn, the BOJ has increasingly warped incentives so fully that Tokyo barely knows where to start to forge a more workable path.

Now, the BOJ is under new pressure to—wait for it—do even more to support growth. Granted, Japan’s 2022 is darkening by the day. The global inflation surge is sending powerful headwinds Japan’s way. That, at the same moment China is slowing, the Federal Reserve is hiking rates and fresh Covid-19 waves are clouding the outlook.

The quickest fix, as always, is to rely on the BOJ to open the monetary spigot just a little wider. Yet you don’t have to be an Einstein to know that would be, well, nuts.

One of the biggest blunders Tokyo made is targeting the wrong thing: 2% inflation. For more than two decades now, a succession of prime ministers and BOJ leaders convinced themselves that if only consumer prices increased, the economy would return to its 1980s heights.

Deflation, though, is a symptom of Japan’s troubles, not the cause. Prices are weak because an aging and shrinking population are inherently disinflationary. And because companies and households lack confidence in future economic conditions.

Japan should’ve targeted 2% wage increases per year or some specific level of GDP increase. That would break companies out of complacency. It also would put the onus on elected officials to do their jobs, not abdicating responsibility to the BOJ.

Kishida has indeed talked a good game of resurrecting the economic reform process. It’s time he did just that. The BOJ, simply put, is tapped out. Any new liquidity it deploys would be of limited potency. Nor is growing the BOJ’s balance sheet further a wise idea. It would only make any eventual withdrawal effort even harder.

The answer is for Kishida’s Liberal Democratic Party to reclaim economic leadership. They must work urgently to reduce red tape, incentivize innovation, catalyze a startup boom, increase productivity, empower women and attract more foreign talent to augment a shrinking workforce.

Since the BOJ can’t do any of these things—even with a $5 trillion-plus balance sheet—it’s high time Tokyo tried something different. Insane, right?