The politicization of central banking continues unabated. The resurrectionof Shinzo Abe and Japan’s Liberal Democratic Party – pillars of the politicalsystem that has left the Japanese economy mired in two lost decades andcounting – is just the latest case in point.
Japan’s recent election hinged critically on Abe’s views ofthe Bank of Japan’s monetary policy stance. He argued that a timid BOJ should learn from its more aggressivecounterparts, the US Federal Reserve and the European Central Bank. Just as theFed and the ECB have apparently saved the day through their unconventional andaggressive quantitative easing (QE), goes the argument, Abe believes it is nowtime for the BOJ to do the same.
It certainly looks as if he will get his way. With BOJGovernor Masaaki Shirakawa’s term ending in April, Abe will be able to select asuccessor – and two deputy governors as well – to dohis bidding.
But will it work? While experimental monetary policy is nowwidely accepted as standard operating procedure in today’s post-crisis era, itsefficacy is dubious. Nearly four years after theworld hit bottom in the aftermath of the global financial crisis, QE’s impacthas been strikingly asymmetric. While massive liquidity injections wereeffective in unfreezing credit markets and arrested the worst of the crisis –witness the role of the Fed’s first round of QE in 2009-2010 – subsequentefforts have not sparked anything close to a normal cyclical recovery.
The reason is not hard to fathom.Hobbled by severe damage to private andpublic-sector balance sheets, and with policy interest rates at or near zero,post-bubble economies have been mired in a classic “liquidity trap.” They aremore focused on paying down massive debtoverhangs built up before the crisis than on assuming new debt and boostingaggregate demand.
The sad case of the American consumer is a classic exampleof how this plays out. In the years leading up to thecrisis, two bubbles – property and credit – fueleda record-high personal-consumption binge. Whenthe bubbles burst, households understandably became fixated on balance-sheetrepair – namely, paying down debt and rebuilding personal savings, rather thanresuming excessive spending habits.
Indeed, notwithstanding an unprecedented post-crisis tripling of Fedassets to roughly $3 trillion – probably on their way to $4 trillion over thenext year – US consumers have pulled back asnever before. In the 19 quarters since the start of 2008, annualized growth of inflation-adjustedconsumer spending has averaged just 0.7% – almost three percentage pointsbelow the 3.6% trend increases recorded in the 11 years ending in 2006.
Nor does the ECB have reason to be gratifiedwith its strain of quantitative easing. Despite a doubling of its balancesheet, to a little more than