by Nomi Prins
That did the trick. By August 3, 2012, Toyota said that its profits during the April–June period jumped to ¥290.3 billion from ¥1.1 billion the year before.103 Quarterly sales increased 60 percent to ¥5.5 trillion compared to sales in 2011, when the earthquake and tsunami affected Japanese carmakers. Toyota’s sales rose in North America, Europe, and the rest of Asia.
Finance minister Jun Azumi said the Japanese government would extend its dollar credit facility to help companies invest overseas as part of its efforts to cope with a strong yen.104 This program, which began in 2011, was supposed to end in March 2013. Azumi believed the “strong yen gives a headwind to Japanese manufacturers.… I want the private sector to make the most of this fund for spending on M&As [mergers and acquisitions] if there are good deals overseas.”
By then, Japan had spent a record ¥8 trillion in unilateral intervention in the currency market. On October 14, 2012, facing concerns from emerging countries that the Fed’s expansionary policy was affecting their economies, Bernanke told a Tokyo audience at a High-Level Seminar sponsored by the BOJ and IMF that there was no evidence confirming such claims.105 He warned that foreign exchange intervention could destabilize capital flows. “The perceived advantages of undervaluation and the problem of unwanted capital inflows must be understood as a package—you can’t have one without the other.”106
This speech marked a turning point in multinational antagonism toward Fed policy. At the same October annual IMF and World Bank meetings in Tokyo, Brazilian minister Guido Mantega remarked, before the IMF’s 118 member countries, that QE3 was a “selfish” effort by the Fed that harmed emerging countries by stealing their share of exports and provoking volatility in currency markets. According to Mantega, “Advanced countries cannot count on exporting their way out of the crisis at the expense of emerging market economies.”107
Criticism came from China and Russia, too. PBOC governor Zhou Xiaochuan said of accommodative monetary policies, “This could… lead to (economic) overheating, asset price bubbles and the buildup of financial imbalances.” Russian finance minister Anton Siluanov told reporters, “Everything is getting done… without regard to the consequences it could have.”108
Although IMF chief Christine Lagarde said the steps of the Fed, ECB, and BOJ were “big policy actions in the right direction,” she added, “Accommodative monetary policies in many advanced economies are likely to entail large and volatile capital flows to emerging economies.”109
Two weeks after the IMF meetings in Tokyo ended, Japanese companies took matters into their own hands, weakening the yen through a series of corporate takeovers. They considered Shirakawa’s actions against the yen’s rise insufficient. Japan’s public debt, the highest among the major developed nations, was approaching double the size of its economy and that finally took a toll on the currency.110 During 2012, the yen depreciated 5.5 percent.111
But that drop only had a minimal impact on companies that relied on exports for the bulk of their profits. In general, the economic and social situation in Japan was critical. Sony and Sharp Corporations fired workers and cut expenses by outsourcing production to places like Taiwan, India, Bangladesh, Vietnam, and even South Korea because the yen’s relatively high value still made their products more expensive overseas, which inhibited sales. Nissan Motor Corporation announced a cut of 20 percent in its full-year profit forecast, blaming the exchange rate. Exports fell 10.3 percent in September compared with the same period in 2011.
ELECTIONS AND MORE STIMULUS
A week after Obama won his reelection bid for the US presidency in November 2012, the Liberal Democratic Party won the general election in Japan, making Shinzo Abe the next prime minister on December 26, 2012.112 Known as a nationalist, he had already served as prime minister in 2007 before resigning for health reasons.
The economic strategy, or phenomenon, “Abenomics” is named after its creator. It entailed a three-point plan to jump-start the domestic economy and consisted of monetary expansion, flexible fiscal policy, and structural reforms. To Abe, his strategy offered a recipe to Japan to become a bigger economic and geopolitical superpower. Monetary expansion was the easiest of the pillars to execute, as long as the right man was running the BOJ. That man would be Haruhiko Kuroda. He would expand the BOJ’s book of assets faster than any other money conjurer in the world.
Abe used his victory pulpit to criticize the BOJ’s policies, saying he would set an inflation target as high as 3 percent. He called for the BOJ to embrace “unlimited easing” so as to “strengthen pressure to lend.”113 Abe didn’t think monetary policy change could wait until the end of Shirakawa’s term.
Abe’s stance affected the market, raising expectations and dampening the yen. On November 20, Shirakawa explained why there would be no change in policy. He said that buying government bonds to finance public works would end up in “reckless money printing” and “that fostering negative interest rates would be risky to financial markets.”114 It seemed like he was done with conjuring money. Japanese government bonds had performed worse than any other developed markets’ bonds that year. The prior month, Shirakawa said he was “sad” the Fed was seen as doing more than the BOJ, when it was the BOJ that had pioneered quantitative easing.115
On December 13, 2012, the Fed, ECB, SNB, BOE, and Bank of Canada announced the extension to February 2014 of the US dollar liquidity swap arrangements set to expire in February 2013.116 These arrangements had already been extended in November 2011 to provide liquidity to European banks as the Eurozone sovereign debt crisis came to a boiling point. The peak of the program, which had begun in 2007, was in 2008, when the use of swap lines reached $583 billion. Nevertheless, rumors flew that the BOJ would ease and consider a higher 2 percent inflation target in 2013 in response to Abe’s demands. On December 18, 2012, Abe said he had talked to Shirakawa during the general election campaign in 2012. “I called for setting a policy accord with the BOJ,” he said. “The governor just listened.”117
On December 26, 2012, after seven prime ministers in six years, Shinzo Abe assumed his former post.118 The yen had fallen to a twenty-seven-month low against the US dollar as investors expected stronger measures from the government to weaken the currency.119 The yen hit 85.84 per dollar, its lowest level since September 2010, and 113.60 per euro, the lowest level since July 2011. Abe’s election raised expectations about its value.
Abe’s second term as prime minister was marked by his decision to make the economy a priority, using, among other things, easy central bank policy as a means to that end. His ambition to elevate Abenomics led to disagreements with BOJ governor Masaaki Shirakawa, who, though he had engaged in conjured-money policies, was a less aggressive conjurer than Abe wanted.120 As a consequence, Shirakawa resigned three weeks ahead of the end of his five-year term.121
Abe’s disappointment with Shirakawa’s lack of easy-money policy aggression showed how much the world had changed, particularly because Japan had invented key elements of money conjuring. And yet, now the very instigator of such strategies wasn’t perceived to be using them liberally enough by a government ostensibly conducting economic policy independently of its central bank’s monetary policy. Years later, on March, 25, 2015, Shirakawa offered the following two points about the post–financial crisis period in an interview with finance education website Money and Banking: “The most impressive new policy measure in the global financial crisis was the arrangement of swap lines between the Federal Reserve and other central banks. This measure was quite effective. I am struck by the fact that these swap lines were opened in only a few days and without any press leakage in advance.”
He noted that the unprecedented monetary policies might not necessarily have been as effective as the Fed and other G7 central bankers would have the world believe they were. “As for unconventional monetary policy measures aimed at macroeconomic stability, I believe that their effect is modest. This tentative conclusion is based on facts rather than on theory. If we look at the path
of real GDP in the post-bubble period relative to the peak of the bubble up to now, there is no difference between Japan’s bubble in the late-1980s and the US bubble in the mid-2000s.”122
Nonetheless, the stock market was delighted by the news of Shirakawa’s early departure, in anticipation of more artificial money to be lavished upon it. The Nikkei 225 soared 3.77 percentage points on the news, its best performance since September 29, 2008.123 Shirakawa was accused of being too hawkish on policy, which was said to have contributed to deflation and keeping the yen too strong—despite its having fallen recently. Abe appointed Asian Development Bank president Haruhiko Kuroda as the new BOJ head. Kuroda assumed office on March 20, 2013.
The BOJ under Shirakawa—a responsible and eager participant in the G7 plans to “solve” the crisis and related economic slowdowns, credit crunches, and other problems—had followed the Fed’s directives. Yet, Shirakawa’s version of QE was too tame for Abe.
Kuroda, the thirty-first governor of the BOJ, became a critical player in executing Abe’s economic policy; he would be responsible for taking Japan into the negative interest rates zone. He was also a fan of global coordination. His February 2013 nomination by the incoming government of prime minister Shinzo Abe was expected. Also nominated at the same time as Kuroda’s two deputies were Kikuo Iwata—“a harsh critic of past BOJ policies”—and Hiroshi Nakaso, a senior BOJ official in charge of international affairs.
Japan, snuggled in between the United States and China, also stood at the center of the West-to-East power shift that occurred after the crisis. Japan, the third-largest economy in the world, also had the highest government debt-to-GDP ratio—at nearly 250 percent of GDP compared to the United States’ 105 percent—which was exacerbated by Kuroda’s policies. By 2014, the BOJ held the largest percentage of government bonds (or public debt) versus GDP compared with any other central bank. The amount of government bonds on its books was equivalent to 87 percent of GDP compared with 26 percent for the United States and 21 percent for the Eurozone.124
Expectations were high that pro-business Abe would revert years of industrial decline and combat a rising China. Abe adhered to the Fed’s cheap-money regimen from a fiscal perspective. He promised faster growth by offering ¥10 trillion (US$120 billion) to public works and emergency stimulus programs. He committed himself to aggressive monetary policy to confront deflation and weaken the yen, measures considered essential to stimulating Japanese industry.
Kuroda did not disappoint. He launched the biggest monetary stimulus ever, twice as fast as the Fed’s quantitative easing program. He became the world’s conjurer-in-chief through the design of his new twist on QE: quantitative and qualitative easing (or QQE).
STABILITY RETURNS?
On February 12, 2013, the G7 leaders convened to discuss the yen’s movement and its impact on global trade relations. They released a statement that seemed to accept a weaker yen, as long as Japan did not actively pursue devaluation as an official strategy.125 Further discussions about the matter occurred during the G20 Finance Ministers and Central Bank Governors’ Meeting held on February 15–16 in Moscow.
In their associated statement, the G7 leaders insisted that they remained committed to exchange rates driven by the market—not by government policy—and that they would consult closely when it came to any sharp movements in foreign currency markets.126
Even though the G20 leaders agreed not to target exchange rates as a tool for fostering competitive positions, tensions regarding a “currency war” flourished. In a similar statement to the G7’s issued a week earlier, the G20 vowed, “We will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes.”127
That confirming statement followed a turbulent period in which expectations were raised that the G20 would reprehend Japan. Though that didn’t happen, speculators launched a sell-off in the yen on the grounds that the G20 was tacitly giving its support to Abe’s and Kuroda’s plans for aggressive monetary easing, even if that had the effect of beating up the yen.
IMF managing director Christine Lagarde went so far as to state that this pronouncement signaled the end of currency wars: “The good news is that the G20 responded with co-operation rather than conflict today.”
But it wasn’t the level of the yen that most concerned the BOJ under its new leader but the flow of money into the Japanese financial system. On April 4, 2013, as one of his first measures as BOJ governor, Kuroda vowed to print ¥136 (US$1.4 trillion) within two years to inject into the markets.128 That would render his money-conjuring program twice as large as the Fed’s. Kuroda agreed it was “an unprecedented degree of monetary easing.”129
The stock market was thrilled. The Nikkei stock index soared 2.2 percent to hit a four-and-a-half-year high; Toyota Motor US-traded shares rose 4.6 percent. The yen fell more than 3 percent against the dollar and 4 percent against the euro, while the Japanese ten-year government bond yield hit a record low.
In the United States, the news attracted another kind of concern. Atlanta Fed president Dennis Lockhart, seemingly oblivious to what was going on in his own country, said watching Japan struggle to confront deflation and revive a sick economy “is not a healthy element of the global scene.” Charles Evans, president of the Chicago Fed, said the move was rather aggressive but added he did “certainly hope that every foreign central bank around the world is able to adopt policies that ultimately lead to the most vibrant economies that those economies can have because we need it around the world.”130
Around the same time, Japan and the United States began negotiating the Trans-Pacific Partnership (TPP). The Obama administration announced in its April 12, 2013, semiannual report on currency practices that it would monitor Japan to ensure it was not devaluing the yen to increase competitiveness.131 The report noted Japanese officials wanted to “correct the excessively strong yen” along with its bond-purchasing program as evidence that Japan was targeting a weaker yen.
The US government pressed Japan to refrain from using devaluation as a way of improving trade competitiveness, as agreed in the G7 and G20 meetings.132 It also noted that China’s currency remained undervalued, but this could not be characterized as an act of currency manipulation according to the legal frame. This represented a softening in the relationship between China and the United States concerning currency issues. The yuan’s appreciation of 16.2 percent against the dollar since June 2010 demonstrated that perhaps there was no need for name calling over currency manipulation.
Yet, the US Treasury remained vigilant on China, more so than on Japan, noting that “evidence suggests the renminbi remains significantly undervalued, intervention appears to have resumed, and further appreciation of the renminbi against the dollar is warranted.”133 The US Business and Industry Council condemned the statement and urged Obama to use tariffs to punish the yuan’s manipulation: “The Treasury Department’s latest refusal to label China a currency manipulator once again demonstrates President Obama’s deep-seated indifference to a major, ongoing threat to American manufacturing’s competitiveness,” the council stated.134
On August 19, 2013, Japanese exports grew at their fastest annual pace in three years as a weaker yen lifted certain sectors of the real economy, boosting car and electronics sales in the United States, Asia, and Europe.135 The yen had depreciated 20 percent since November 2012. The new government and its economic policy altered the situation by easing monetary policy to raise the competitiveness of the export-driven Japanese economy. Although an increase of 12.2 percent in exports came in less than the Ministry of Finance had estimated, it was the biggest gain since the end of 2010.
On August 21–23, 2013, the Federal Reserve Bank of Kansas City hosted its annual economic policy symposium conference in the exclusive resort area of Jackson Hole, Wyoming. Central bankers, policymakers, economists and academics from all corners of the world attended.136
The event took place without the participation of Ben Bernanke, who had gi
ven the introductory speech every year since becoming Fed chairman in 2006, and who was said to have a personal scheduling conflict.137 It was the first time since 1998 that a Fed president wasn’t in attendance at the Fed-hosted shindig.138 Two other major central bank leaders, who notably had both worked as senior executives for US powerhouse investment bank Goldman Sachs did not attend either: Mario Draghi and Bank of England governor Mark Carney. They were represented by Frank R. Smits, director general, Directorate General Research, European Central Bank, and Charles R. Bean, deputy governor, Bank of England.
But governor Haruhiko Kuroda, Fed vice chairwoman Janet Yellen, IMF director Christine Lagarde, and Bank of Mexico governor Agustín Carstens were all there. Although Bernanke was not present, his easing policies and the global economy were the main topics of conversation.
Kuroda gave a speech titled “Japan’s Unconventional Monetary Policy and Initiatives Toward Ensuring Stability of the Global Financial System,” noting in his opening remarks that the global economy had not yet recovered completely from what he referred to as the Lehman shock.139 He went on to outline the quantitative and qualitative monetary easing (QQE) that the BOJ had launched in April and ended with comments about “the relationships between unconventional monetary policy and the global financial markets.”
He pinpointed the extent to which the Bank of Japan, “in coordination with other central banks, has endeavored to maintain the stability of the global financial system through instruments such as making currency swap arrangements, improving the frameworks of cross-border collaboration and enhancing regional financial infrastructure, including fostering Asian bond markets.” He closed by emphasizing that “it is increasingly important to have international coordination with regard to the prevention and management of a financial crisis.”140