Since 1999, the Bank of Japan has done virtually everything imaginable to defeat deflation. It pumped untold trillions of dollars of liquidity into markets, cornered government bond trading, hoarded stocks and pushed interest rates negative.
Little did Tokyo know that bitcoin might be the answer to its prayers. Actually, make that cryptocurrencies with a timely assist from rival China.
For years now, economists like Andy Haldane at the Bank of England argued that central bank-issued digital currencies were the answer to defeating deflation. The idea is that digital tools could help policymakers gain greater traction in efforts to extend credit. And yet, the Bank of Japan largely dragged its feet.
Governor Haruhiko Kuroda has long expressed an openness to “study” whether the BOJ should create a digital yen and the mechanics of how it might work. He acted glacially. Now, as China races ahead in doing just that, the sense of urgency at BOJ headquarters is growing.
Last weekend, Kuroda’s team unveiled plans to experiment with a digital yen this spring. It’s impossible to separate the timing of these tests with Beijing’s assertive push to dominate the digital money space. President Xi Jinping’s government has already begun public trials of a digital yuan.
In catalyzing Tokyo to play catchup, the People’s Bank of China is doing Japanese Prime Minister Yoshihide Suga a favor in two ways. One, welcoming the cryptocurrency industry is, like it or not, a necessary evil if Tokyo is to maintain relevance as a global financial hub. Two, hastening the use of a BOJ bitcoin of sorts could do more to normalize inflation than Kuroda achieved in eight years on the job.
Even before Covid-19 arrived, Team Kuroda at its best moments only got about halfway to Tokyo’s 2% inflation target. And those gains were of the “bad” variety: imported cost spikes thanks to oil and other commodities.
Now, consumer prices are back in the red. In January, inflation fell 0.6% year on year, a sixth straight monthly decline. The 1% drop in December was the biggest in a decade.
Yes, the coronavirus is an obvious culprit. And the rising odds Tokyo will cancel a 2020 Olympics delayed by a year surely doesn’t help. Attracting some 40 million tourists last year was a key pillar of the Japan-is-back revival strategy.
Who can forget then-Prime Minister Shinzo Abe’s big Super Mario moment in 2016? It was during the closing ceremony of the Rio de Janeiro Olympics that Abe appeared dressed as the video game legend. It was his way of signaling that Japan is a quirky, lively place putting out a giant welcome mat for a tourism boom. It also was about growing cultural export industry that might help Japan emerge from its deflationary funk.
Things aren’t going as planned. After several years of cornering the bond and stock markets and driving down the yen, the Kuroda BOJ has little to show for its efforts. Sadly, trillions of dollars of BOJ liquidity driving Nikkei 225 Average stock to 30 highs is leaving households behind. Wages have not surged as Abe promised back in 2012.
This leaves Kuroda & Co. with quite a conundrum. It already effectively nationalized the bond and stock markets. It tried aggressive currency manipulation and negative yields. Kuroda tried to spin consumers and businesses to spend more, even conjuring Peter Pan for dramatic effect. The BOJ has tried everything, it seems, except for a strategy Haldane and other economic futurists argue might work.
The power of a digital yen could just give the BOJ the higher gear it lacked all these years to drive consumer and business confidence upward. The gist of the argument is that as global markets become more sophisticated, disintermediated and news sources become more segmented, central bankers are having a harder time steering mass psychology.
That’s costing the BOJ and other central banks the “multiplier effect” that makes monetary policy so potent. A digital currency could increase the traction policymakers get from shifts in the amount of currency in circulation.
As Japan has found, consumers don’t react as expected when interest rates go negative. All too many respond by pulling cash out of bank accounts and saving, a tendency that’s only grown in the Covid-19 era. More than ever before, the credit central banks generate is subject to the vagaries of human nature and herd psychology at a wildly uncertain moment.
A digital yen could help the BOJ with the “zero lower bound barrier,” or ZLB, problem. It would give policymakers greater scope to influence cash withdrawals. Central banks could levy penalties for excess savings, top-up electronic accounts or deploy other inducements to boost consumption.
In other words, as Haldane and his ilk argue, a digital currency could supersize the BOJ’s financial firepower. It would, in Haldane’s view, “preserve the social convention of a state-issued unit of account and medium of exchange, albeit with currency now held in digital rather than physical wallets. But it would allow negative interest rates to be levied on currency easily and speedily, so relaxing the ZLB constraint.”
And give the BOJ the secret weapon it’s lacked until now to put deflation in the rearview mirror once and for all.