In stagnant Japan, ECB policymakers catch glimpse of their own future

June 9, 2019

By Francesco Canepa and Leika Kihara

FUKUOKA, Japan (Reuters) – Europe’s top central bankers who met their global peers in Japan this weekend may have caught a glimpse of their own future.

With a stagnant economy and declining population for the past two decades, Japan has long been seen as a harbinger for the euro zone.

Talk of the “Japanification” of the currency bloc is set to gain further traction after European Central Bank President Mario Draghi last week shelved plans to raise interest rates from record lows and opened the door to ease policy further.

That evoked parallels with the Bank of Japan’s prolonged stimulus policy under Governor Haruhiko Kuroda, which has seen it gobble up 45 percent of the country’s government debt as it tries to hit an elusive 2 percent inflation target.

“There’s a real risk of Japanification right now,” one euro zone central bank official said at the meeting of finance ministers and central bank governors in Fukuoka, southern Japan.

The similarities are obvious. Both Japanese and euro zone governments have been slow in implementing politically costly but much-needed reforms to boost productivity, such as making their labor markets more flexible.

This has created a negative loop whereby low borrowing costs allow loss-making “zombie” firms to survive, locking up capital that could be used by more competitive ones, curbing productivity growth and perpetuating the need for low interest rates, analysts say.


Whether that means monetary policy could be carbon-copied is less clear. Unlike the BOJ, the ECB must seek consensus among a group of diverse national central banks.

In Japan, the BOJ can keep printing money to keep borrowing costs ultra-loose under the administration of Prime Minister Shinzo Abe, which is supportive of its pro-growth policies.

The prospect of an endless supply of central bank money to finance government debt, however, is a hard sell for Germany – the most powerful economy in the euro area.

Following the BOJ’s lead in buying stock index funds and other risky assets would also likely come under heavy resistance in the euro zone, where stocks are in hands of a healthy few.

Past experience showed lessons don’t always travel well.

The BOJ took a leaf from Europe’s book when it adopted negative interest rates in 2016. It took lessons from similar steps already put in place by central banks in Europe.

But the measure has been deeply unpopular among Japan’s public and pushed long-term interest rates down too much, angering financial institutions which saw their margins crushed.

That made deepening negative rates among the least likely options even if the BOJ has to ease further, analysts say.

The BOJ’s lessons on quantitative easing aren’t very promising either. Its massive debt purchases have dried up market liquidity and stoked concern the institution will run out of bonds to buy.

This is a predicament that will be all too familiar to ECB policymakers who face the additional challenge of respecting each country’s quota when picking bonds to buy.

Still, some euro zone central bankers see the BOJ as a paragon of success for the mere fact that Kuroda’s bold stimulus measures helped avert an economic downturn.

“The BOJ is much more advanced than the ECB down the stimulus path and shows you can do even more quantitative easing without endangering financial stability,” a euro zone central banker said.

“The situation in Japan would be much worse had the BOJ not intervened, as indeed it was before.”

(Editing by Kim Coghill)

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