China can still steer clear of Japan's costly mistakes. Unfortunately
Zhou seems committed to repeating the mistakes made by Masaru Hayami, the
former governor of the Bank of Japan.
The longer China’s
economy stalls, the lonelier Zhou Xiaochuan, governor of the People’s Bank of
China, is certain to get. There’s simply no playbook for a central banker
facing so many competing challenges: deflation, excessive debt, chaotic global
financial markets and vested interests resisting reform. Zhou seems to have
little choice but to make things up as he goes along.
But if Zhou is
interested in consulting a cautionary tale, he might consider the decisions
made by policy makers in Japan in 1998, when that country was on the precipice
of deflation and bore an eerie resemblance to China’s present situation.
(Japan’s deflationary slide was triggered by a massive debt buildup, a greying
population and rigid industrial policies; if that sounds familiar to China watchers, it should.)
Unfortunately, Zhou
seems committed to repeating the mistakes made by Masaru Hayami, the former
governor of the Bank of Japan.
On Monday, Zhou cut
the PBOC’s one-year lending rate by 25 basis points to 5.1 percent, his third
cut in six months. That excited China’s stock traders. But, as Hayami’s
experience shows, incremental moves of this sort aren’t a long-term fix. If
Zhou hopes to avoid deflation in China, he should pay particular attention to
three of Hayami’s missteps.
First, Hayami should
have been far more aggressive with monetary stimulus. Initially, his problem
was sheer denial. Two months before he took the helm at the BOJ in 1998, his
predecessor Yasuo Matsushita insisted that there was no
reason to expect deflation in Japan; Hayami operated under the same delusion
after taking office.
Hayami eventually
acknowledged that deflation was an issue, but even then he wasn’t bold enough.
Although Hayami is sometimes remembered as the father of quantitative easing,
which he pioneered in 2001, his initial attempts at monetary stimulus were far
too timid. Part of the reason current BOJ Governor Haruhiko Kuroda is still pumping liquidity
into the Japanese economy today is that 14 years ago Hayami only lowered rates
hesitantly and incrementally. (The US Federal Reserve, by contrast, is
preparing an exit strategy from its more ambitious quantitative easing program
after just six years.)
The second thing
Hayami should have done — and Zhou should do now — is take toxic
assets off bank and local-government balance sheets. For a decade, Tokyo
underreported the magnitude of its bad-loan problem; as a result, corporate
Japan only got serious about writing off bad debt beginning in the early
2000s. If the BOJ had loaded up on distressed assets during Hayami’s tenure,
Japan’s financial sector might have healed long ago. Instead, Japan’s
distressed debt festered, its falling price cycle accelerated and its banks
refused to extend credit because they suffered from what Kuroda calls a “deflationary mindset.”
Hayami’s third failing
was that he was too timid with his bully pulpit. He was right to insist that
Japanese deflation was less about the supply of yen than growth-stifling
regulations, monopolistic behavior and a dearth of policy imagination in
government. But he enabled Tokyo’s political paralysis in ways Zhou would be
wise to avoid. Hayami, for example, could have sought a series of quid pro quos:
I’ll print more yen, he might have told the government, if you shake up the
banking sector, reduce trade barriers, cut red tape and tweak taxes to
encourage innovation.
China can steer clear
of these costly mistakes. Zhou could cut rates faster and by bigger increments
as China’s deflation risks deepen. The PBOC could start taking loans that are
destined to default off the books of big banks and municipalities. And Zhou could
leverage his international gravitas to prod President Xi Jinping‘s team to internationalize the
country’s financial system and foster greater competition in the economy.
But until now Zhou has
only initiated baby steps, just as Hayami did. And there’s no reason to expect
the results this time will be any different.
William Pesek is a
Bloomberg View columnist based in Tokyo and writes on economics, markets and
politics throughout the Asia-Pacific region.
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