In pressuring the BOJ to be more aggressive, Abe treads the erroneous path of the Fed and the ECB
The politicisation of central banking continues unabated. The resurrection of Shinzo Abe and Japans Liberal Democratic Partypillars of the political system that has left the Japanese economy mired in two lost decades and countingis just the latest case in point.
Japans recent election hinged critically on Abes views of the Bank of Japans monetary policy stance. He argued that a timid BOJ should learn from its more aggressive counterparts, the US Federal Reserve and the European Central Bank. Just as the Fed and the ECB have apparently saved the day through their unconventional and aggressive quantitative easing (QE), goes the argument, Abe believes it is now time for the BOJ to do the same. It certainly looks as if he will get his way. With BOJ Governor Masaaki Shirakawas term ending in April, Abe will be able to select a successorand two deputy governors as wellto do his bidding.
But will it work? While experimental monetary policy is now widely accepted as standard operating procedure in todays post-crisis era, its efficacy is dubious. Nearly four years after the world hit bottom in the aftermath of the global financial crisis, QEs impact has been strikingly asymmetric. While massive liquidity injections were effective in unfreezing credit markets and arrested the worst of the crisiswitness the role of the Feds first round of QE in 2009-2010subsequent efforts have not sparked anything close to a normal cyclical recovery.
The reason is not hard to fathom. Hobbled by severe damage to private and public-sector balance sheets, and with policy interest rates at or near zero, post-bubble economies have been mired in a classic liquidity trap. They are more focused on paying down massive debt overhangs built up before the crisis than on assuming new debt and boosting aggregate demand.
The sad case of the American consumer is a classic example of how this plays out. In the years leading up to the crisis, two bubblesproperty and creditfuelled a record-high personal-consumption binge. When the bubbles burst, households understandably became fixated on balance-sheet repairnamely, paying down debt and rebuilding personal savings, rather than resuming excessive spending habits.
Indeed, notwithstanding an unprecedented post-crisis tripling of Fed assets to roughly $3 trillionprobably on their way to $4 trillion over the next yearUS consumers have pulled back as never before. In the 19 quarters since the start