Big bazookas

Japan prizes caution and consensus. So it was remarkable when the Bank of Japan (BoJ) suddenly promised to buy ¥80 trillion ($705 billion) of government bonds a year until the economy is clear of deflation— and the government’s huge pension fund joined it, saying that it would double its holdings of Japanese and foreign equities. With annual purchases equivalent to over 15% of GDP, the BoJ is venturing into new territory. Relative to the economy, its balance-sheet will dwarf those of the Fed, the Bank of England or the European Central Bank.

The move was prompted by what the BoJ’s governor, Haruhiko Kuroda, described as a “critical” moment in Japan’s attempts to escape from deflation. Getting inflation up is central to the economic program of the prime minister, Shinzo Abe. Mr. Kuroda recently promised that core inflation would never again fall below1%. But after a rise in the consumption tax in April, the economy slowed and in September core inflation dipped to Mr. Kuroda’s threshold.

The BoJ was right to move boldly. The past two decades have been a story of too little, too late, for Japan. But not everybody is comfortable with the move. Four of the bank’s board members voted against it—which was also a shock.

Critics worry about the impact of an already weak yen weakening further. Since the earthquake and tsunami of March 2011, Japan has been virtually without nuclear power. It therefore relies on imports to satisfy almost all its energy needs. At a time when real wages are already falling, the weaker yen has pushed up household energy costs by over a quarter. Big firms that export are benefiting, but the small and midsized businesses that employ most of Japan’s workers are being squeezed. A survey suggests four-fifths of such firms do not want the yen above ¥109 to the dollar. It is now¥114.

But energy prices are falling, offsetting the effects of a weaker currency—one reason why Mr. Kuroda felt able to move. A bigger concern is that Mr. Abe has been relying on monetary policy to wow markets and foreign investors while failing to push ahead with the politically difficult parts of his economic program. These include structural reforms to boost sluggish long-term growth and a credible plan to stabilize Japan’s parlous finances (the government’s deficit and public debt stand at 6% and 240% of GDP respectively).

In June Mr. Abe unveiled proposals to sharpen incentives in the labor market, open up restricted sectors and revamp corporate governance. Yet the blizzard of proposals—over 240 of them—showed little sense of priorities, which suggests they were intended in part for effect. Some progress has been made, including on getting more women into work (see page 41), but much has languished. Mr. Abe’s earlier promises to bring down steep tariffs on beef and other farm goods look thin; negotiations with America over joining the Trans-Pacific Partnership, a free-trade grouping, are stalled. Some Americans, once fans of Mr. Abe, wonder whether he is all hat and no cattle.

Mr. Kuroda’s stimulus was intended to make it easier for the prime minister both to carry out structural reforms and also to raise the consumption tax. Now Mr. Abe must forge ahead with the reforms. On the tax, however, he should tread cautiously. Private consumption is too weak for the economy to bear a tax rise right now. So Mr. Abe should instead announce legislation for the tax to go up by one percentage point a year, for12 years. The increases should start when the economy can bear it. That will not be next year. Boldness in monetary expansion; boldness in structural reform; caution in fiscal contraction. It will be a delicate operation: but Japan’s situation is indeed very delicate.

NOVEMBER 8TH-14TH 2014

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