Of all the challenges the Bank of Japan expected in 2020, the return of deflation was probably not high on their list.
Welcome to Governor Haruhiko Kuroda's nightmare year, one that is undoing much of his monetary handiwork over the last 88 months. Japan is back in recession as the coronavirus collides with the trade war. Even worse, a recent Nikkei survey suggests that a majority of Japanese CEOs think it will take at least two years to recover.
What is truly worrisome, though, are all the unknowns lurking beyond the horizon. Will fresh waves of COVID-19 infections force another lockdown? How far will President Donald Trump go lashing out at Beijing ahead of the November 3 U.S. election? Can China, Japan's main customer, avoid its own downturn?
Such risks put the onus on Kuroda to protect the gains made since he assumed control of the BOJ in March 2013. As he tends to Tokyo's animal spirits, though, Kuroda is haunted by a vow he made seven years ago: the BOJ will "do whatever it can" to defeat deflation once and for all.
Kuroda's Mario Draghi moment is not aging well. The reference here is to the former European Central Bank's famous 2012 preparedness pledge. For a few years, Kuroda channeled it masterfully. He hoarded enough government bonds to drive down the yen by 30% to help exporters. He gorged on stocks via exchange-traded funds and big-footed other asset classes to pump cash into the economy.
Inflation seemed on the verge of a comeback -- only to relapse into falling prices. Granted, nothing of the sort Japan suffered from the late 1990s until the mid-2010s. The BOJ now expects consumer prices to fall 0.5% in the fiscal year ending in March. That is a far cry from the 2% inflation goal.
This makes the complete indifference of Kuroda and his team all the more perplexing.
As COVID-19 risks surged in recent months, Kuroda proclaimed repeatedly that the BOJ will not hesitate to ease further if needed. What are we waiting for? The last thing Kuroda wants is to be the central banker who cried wolf during a pandemic. Particularly with peers from Washington to Jakarta reminding businesses, investors and households that they are on top of things.
By their inaction, Kuroda & Co. are botching the endgame of one of history's most audacious monetary experiments.
