Japanese monetary firepower misses mark
There is no easy way to translate the phrase “shoot yourself in the foot” into Japanese. That is a pity. Six months ago the Tokyo government privatised the Japan Post Bank - a financial group with more than Y200tn of assets - by selling Y12tn worth of shares to the public.
The hope was that this would finally tempt ordinary investors - the so-called Mrs Watanabes of Japan - to embrace equity ownership, encouraging households to abandon cash and assume asset risk, boosting growth.
That, however, was before the Bank of Japan’s introduction in January of negative interest rates - which this week tipped yields on 10-year Japanese government bonds below zero. This will hit JPB harder than any other institution, since almost half its portfolio is held in such bonds.
Unsurprisingly then, its share price plunged more than 20 per cent below the initial public offering level . Instead of teaching Mrs Watanabe the joys of equity risk, the JPB policy has left her burnt.
Many outside Japan will be tempted to dismiss this as a local peculiarity. That would be a mistake. The lesson from this saga is that it is not just investors being pushed into an Alice-in-Wonderland financial world by today’s wild central bank monetary experiments. Governments, too, are being tipped into peculiar policy contradictions, raising questions about whether negative rates will do what they are intended to do, in Japan as elsewhere.
To understand this, take a look at the mechanics of Japan’s experiment. When the BoJ introduced negative rates, officials argued they would boost growth because the shock would finally force companies and investors to do something productive with their mountains of idle cash or bank deposits.
That sounds sensible, but since officials also feared that negative bank rates would cause depositors to stuff cash under the mattress, they took a leaf from Switzerland’s book and designed policies to ensure retail accounts are not subject to negative rates. The only deposits with negative rates are those held at the central bank itself by big institutions - about Y10tn of assets .
Now, if that Y10tn pot belonged to companies or banks, there might be a clear transmission mechanism to the “real” economy. But Brian Waterhouse, an analyst at Asia-focused brokerage CLSA, estimates that Y8tn emanates from none other than JPB , which is not allowed to make loans. Of course, if the company responded to negative rates by buying risky Japanese assets, such as equities and bonds, it could still create indirect sources of credit though at present it does not seem to be doing so.
Instead, JPB managers, like other asset managers, seem more inclined to put money overseas. In theory, that could provide another type of transmission mechanism: an important, if unstated, reason for the BoJ’s introduction of negative rates was the hope that it would weaken the yen. Sadly even this policy has backfired: in the past month the yen has strengthened by 7 per cent against the dollar, which, in turn, has undermined the credibility of the central bank.
Maybe this is a temporary setback. And some BoJ officials think there will be other transmission channels. In particular, they hope that the shock of negative rates will force Prime Minister Shinzo Abe to introduce equally radical structural reforms to the corporate world and labour markets. In particular, the BoJ is urging companies to raise wages in order to fight deflation and find uses for spare corporate cash.
Even this idea seems contradictory. In a world of negative rates, it is hard to see why companies would suddenly feel inspired to raise salaries sharply. Watching government bond yields turn negative has made business leaders more, not less, fearful.
Of course, for the incorrigible optimist, it is possible to see a silver lining: as Jesper Koll of Wisdom Tree asset managers points out, the fact that policy is failing might yet force the Abe government to act. Mr Koll expects to see even more radical fiscal measures soon, in the form, for example, of “cash handouts to low-income pensioners” and assistance to mothers. “Helicopter money could become a real possibility,” he says.
Perhaps so, but without such a gesture from Mr Abe’s team, the sad message is that Japan and its central bank seem stuck. Consider it a lesson in the need for concerted government action.
According to Hiroshi Nakaso, deputy BoJ governor, it is a sign that monetary policy alone “is not a panacea” when deflation hits. Either way, global investors should look at JPB and wince. So should poor Mrs Watanabe
