It is scarcely a secret that Shinzo Abe, who will become Japan’s prime minister this week, hasn’t much time for Masaaki Shirakawa, governor of the Bank of Japan. Abe has already said he will replace Shirakawa when the central banker’s term of office expires in April. In the meantime he is threatening to resort to law to get Shirakawa to adopt the 2% inflation target Abe has been championing in an attempt to inflate the Japanese economy back into growth.
Shirakawa has led the Bank with extreme caution. He has not embraced aggressive monetary policy to the extent of his counterparts in the other large economies. Last week he announced an expansion of the Bank’s asset buying program to 91 trillion yen ($1.1 trillion) but ignored Abe’s calls for a 2% inflation target.
All too little, too late, in Abe’s view. Abe is a hyper-expansionist, and campaigned on “Abenomics”, the notion of flooding the moribund economy with money to restart growth and using the inflation expectations that would create to weaken the yen and so help Japan’s hard pressed exporters. Abe is the cheerleader for those who believe Shirakawa’s excessive caution and tolerance of deflation has hamstrung the world’s third largest economy in recovering from the 2008 global financial crisis.
Shirakawa’s counter is that Japan’s economic problems are more structural than cyclical, and so traditional cyclical remedies on however large a scale are inadequate. They won’t solve Issues of overregulation to protect vested interests, which government can but doesn’t tackle, and more intractable questions of demographics; Japan’s population is aging faster than that in any developed economy.
In short, Shirakawa says that Japanese businesses aren’t investing for a lack of cheap and available credit. They are holding back because the government hasn’t created an attractive environment for them to invest.
In such circumstances, Shirakawa would argue, printing money to pay for huge public spending on infrastructure, as Abe proposes, would only put the solvency of the state at risk. Japan’s debt to GDP ratio is already more than 200%. In the short term, that fear would translate in higher interest rates that would make the government’s existing deficit more difficult and more expensive to finance. There is also a danger that Abenomics will be seen by the outside world as a beggar-thy-neighbor currency intervention that would be against international rules.
Come April such pesky external and internal objections to Abenomics will be brushed aside. The new prime minister will have “someone who supports our thinking” running the Bank of Japan. The central bank’s next policy meeting next month will show whether Shirakawa is prepared to bow to Abe’s demands or whether he plans to bow out in April fighting to the end.