Markets might love Abenomics (Benankonomics? Kurodanomics?) but George Soros doesn’t.
“What Japan is doing is actually quite dangerous because they are doing it after 25 years of just simply accumulating deficits and not getting the economy going,” Soros said earlier this morning on CNBC, a day after Haruhiko Kuroda, the new governor of the Bank of Japan, announced a monetary program of unprecedented aggressiveness.
“If what they’re doing gets something started, they may not be able to stop it,” he added.
World, meet the new Abenomics talking point: what BoJ policy might cause. And you’d better get used to it. Japan’s economic situation is so singularly awful that really anything could happen. And that includes lots of not-that-scary outcomes. But balanced speculation is boring, and doomsday scenarios like Soros’s make for unusually compelling financial TV taglines.
Of course, Soros is pointing out a real risk. The bank of Japan wants the yen to weaken. But if the currency weakens too much, it could prompt investors to dump Japanese assets, such as Japanese government bonds (JGBs). A sharp JGB selloff would raise the interest rates Japan has to pay to roll over its incredibly large debt load, and could potentially set off a dangerous spiral of ever higher debt, as we’ve discussed.
However, the nasty undercurrent to these increasingly common sermons is a condemnation of the BoJ’s and Kuroda’s undue riskiness. While Soros was fairly explicit, Cassandra-izing about “monetizing the debt” and “central bank independence” are also popular codewords in this monetary moralizing, as though it simply hadn’t dawned on Team BoJ to think through the potential consequences of its policies.
But risk is exactly the point of Kuroda’s monetary policy. In the simplest terms possible, the goal of quantitative easing is to discourage financial conservatism and encourage spending, by pushing households and businesses to take on risk, and assuring them that monetary conditions aren’t going to change on them any time soon.
And if Soros doesn’t favor this type of risk-taking, why didn’t he offer a better idea about how to defeat deflation and revive the economy?
You know, that’s the one thing these paragons of monetary piety never address: What they’d do if they were in Kuroda’s shoes. Or, for that matter, what might happen if Japan didn’t slough off the risk-aversion of a decade’s worth of feckless BoJ governors.
But that’s because there is no “might” to be mused on. If some clone of Masaaki Shirakawa (Kuroda’s predecessor as governor) were to extend the BoJ’s legacy of lethargy, deflation would certainly continue to worsen. Wages would certainly continue to fall. Businesses would certainly continue to shutter. And Japan’s economy would certainly continue to waste away, taking 127 million people’s chance for prosperity along with it.