Abe’s biggest economic policy legacy looks exhausting

Shinzo Abe, the slain former Japanese leader, left his greatest mark on the Japanese economy in one act: the appointment of a central bank governor committed to rolling out massive and sustained stimulus. This vigorous campaign to sustain growth and raise inflation may be nearing its expiry date.

For all the homage to “Abenomics” – a mix of monetary, fiscal and regulatory reforms aimed at ending years of perceived decline – only the first of these components had any real resistance. By tapping Haruhiko Kuroda to lead the Bank of Japan, a post somewhat isolated from the daily cuts and pushes of politics, Abe ensured that the printing presses would be running hot after his resignation as prime minister in 2020. But such aggressive easing has a sunset clause, given the march to higher interest rates in almost every other economy and the long-awaited achievement of 2% inflation in Japan.

Kuroda’s second five-year term expires in April. It might be hard to resist the pressure on his successor to take a different approach, or at least add significant nuance to the current position. Prime Minister Fumio Kishida had little to say about the type of person who should follow Kuroda. Kishida, like Abe, is committed to monetary easing. But even a modest tightening – predicted by a minority of economists – would leave Japanese policy still very loose compared to its peers.

Abe’s legacy, delivered through his avatar Kuroda, is that deflation appears to have been defeated. For decades after the collapse of a housing bubble in the early 1990s, Japan struggled with either modest price declines or too-low-to-comfortable inflation. The economy had been in and out of recession under a revolving door of prime ministers and an endless parade of supplementary budgets. Abe and Kuroda attempted to extricate Japan from what Kuroda called “a deflationary mindset.” A generation of Japanese grew up without any significant direct experience of the pressures of the cost of living.

Then Abe brought the Liberal Democratic Party back to power in 2012, determined to break the cycle of decline. After a few months, he brought in Kuroda, a shrewd career bureaucrat with a thinly disguised desire to open the monetary floodgates. Japan had experimented with so-called unconventional policy – ​​quantitative easing and near-zero borrowing costs – for some time, with little real effect. Kuroda accelerated that effort, armed with a beefed up 2% inflation target recently granted by Abe’s government. He was determined to hit it and pump up the economy until he got there, with the added benefit of knowing the new prime minister was behind him. In a series of close votes at the BOJ board, Kuroda prevailed. The balance sheet grew rapidly, and in 2016 the benchmark rate was pushed back into negative territory.

None of this has been entirely without controversy. Regional lenders have long complained about the threat to earnings from negative rates. More recently, a price spike attributed to pandemic-era bottlenecks and Russia’s invasion of Ukraine has prompted complaints from the public and politicians. Japan has met its 2% target, even though it has received powerful assistance from forces far beyond its borders. The sudden flip-flop in the inflation landscape has generated a backlash: Kuroda was recently vilified on social media when he had the nerve to suggest in a speech that Japanese consumers were beginning to tolerate widespread price hikes . He was dragged before a parliamentary committee and recanted.

The yen’s 15% decline this year against the dollar, the largest of all major currencies, is also contributing to inflation. The main culprit for this weakening is Kuroda’s stubborn refusal to join the global race to withdraw the stimulus. At press conferences, the answer to almost every conceivable way of asking him about the easy money outing is “No, no, no.” In practice, this only binds the central bank as long as Kuroda is there.

Are Abe and his man at the BOJ getting too much credit for the huge easing of the 2010s? They weren’t the only ones talking about easy gambling. The Federal Reserve only concluded Bernanke-era QE in 2014. US rates were raised only gradually over the next few years before being cut aggressively in response to the pandemic. The year Abe returned to office, in 2012, European Central Bank boss Mario Draghi pledged to do “whatever it takes” to keep the eurozone together. The route Abe blessed for Kuroda was very much in vogue at the time.

It would be rude to deny Abe, killed Friday by an assassin, his due. One of the great powers a leader has is that of appointment. Abe used this authority to good effect when it came to monetary jobs. He gave Kuroda BOJ board members who were committed to policy direction, if not all statements.

It’s ironic that after years of trying to spur inflation and finally achieving some success, the situation is so unpopular. A student of history and the product of a political family, Abe knew nothing about the politics – or politics – that lasts forever. But give him his due: when it comes to the monetary arena, he knew where he wanted to go and found someone to help him get there.

• Abe made Japan assertive. Can he stay the course? : Gearoid Reidy

• Abe’s greatest achievement was forging a new Asia: Mihir Sharma

• BOJ seems to relish stubborn isolation: Moss and Reidy

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Bloomberg News’ economics editor.

More stories like this are available at bloomberg.com/opinion

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