Stephen Roach On Why Abe's Aggression Won't Save Japan

Tyler Durden's picture

Authored by Stephen Roach, originally posted at Project Syndicate,

The politicization of central banking continues unabated. The resurrection of Shinzo Abe and Japan’s Liberal Democratic Party – pillars of the political system that has left the Japanese economy mired in two lost decades and counting – is just the latest case in point.

Japan’s recent election hinged critically on Abe’s views of the Bank of Japan’s monetary policy stance. He argued that a timid BOJ should learn from its more aggressive counterparts, the US Federal Reserve and the European Central Bank. Just as the Fed and the ECB have apparently saved the day through their unconventional and aggressive quantitative easing (QE), goes the argument, Abe believes it is now time for the BOJ to do the same.

It certainly looks as if he will get his way. With BOJ Governor Masaaki Shirakawa’s term ending in April, Abe will be able to select a successor – and two deputy governors as well – to do his bidding.

But will it work? While experimental monetary policy is now widely accepted as standard operating procedure in today’s post-crisis era, its efficacy is dubious. Nearly four years after the world hit bottom in the aftermath of the global financial crisis, QE’s impact has been strikingly asymmetric. While massive liquidity injections were effective 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 – subsequent efforts have not sparked anything close to a normal cyclical recovery.

The reason is not hard to fathom. Hobbled by severe damage to private and public-sector balance sheets, and with policy interest rates at or near zero, post-bubble economies have been mired in a classic “liquidity trap.” They are more focused on paying down massive debt overhangs built up before the crisis than on assuming new debt and boosting aggregate demand.

The sad case of the American consumer is a classic example of how this plays out. In the years leading up to the crisis, two bubbles – property and credit – fueled a record-high personal-consumption binge. When the bubbles burst, households understandably became fixated on balance-sheet repair – namely, paying down debt and rebuilding personal savings, rather than resuming excessive spending habits.

Indeed, notwithstanding an unprecedented post-crisis tripling of Fed assets to roughly $3 trillion – probably on their way to $4 trillion over the next year – US consumers have pulled back as never before. In the 19 quarters since the start of 2008, annualized growth of inflation-adjusted consumer spending has averaged just 0.7% – almost three percentage points below the 3.6% trend increases recorded in the 11 years ending in 2006.

Nor does the ECB have reason to be gratified with its strain of quantitative easing. Despite a doubling of its balance sheet, to a little more than €3 trillion ($4 trillion), Europe has slipped back into recession for the second time in four years.

Not only is QE’s ability to jumpstart crisis-torn, balance-sheet-constrained economies limited; it also runs the important risk of blurring the distinction between monetary and fiscal policy. Central banks that buy sovereign debt issued by fiscal authorities offset market-imposed discipline on borrowing costs, effectively subsidizing public-sector profligacy.

Unfortunately, it appears that Japan has forgotten many of its own lessons – especially the BOJ’s disappointing experience with zero interest rates and QE in the early 2000’s. But it has also lost sight of the 1990’s – the first of its so-called lost decades – when the authorities did all they could to prolong the life of insolvent banks and many nonfinancial corporations. Zombie-like companies were kept on artificial life-support in the false hope that time alone would revive them. It was not until late in the decade, when the banking sector was reorganized and corporate restructuring was encouraged, that Japan made progress on the long, arduous road of balance-sheet repair and structural transformation.

US authorities have succumbed to the same Japanese-like temptations. From quantitative easing to record-high federal budget deficits to unprecedented bailouts, they have done everything in their power to mask the pain of balance-sheet repair and structural adjustment. As a result, America has created its own generation of zombies – in this case, zombie consumers.

Like Japan, America’s post-bubble healing has been limited – even in the face of the Fed’s outsize liquidity injections. Household debt stood at 112% of income in the third quarter of 2012 – down from record highs in 2006, but still nearly 40 percentage points above the 75% norm of the last three decades of the twentieth century. Similarly, the personal-saving rate, at just 3.5% in the four months ending in November 2012, was less than half the 7.9% average of 1970-99.

The same is true of Europe. The ECB’s über-aggressive actions have achieved little in the way of bringing about long-awaited structural transformation in the region. Crisis-torn peripheral European economies still suffer from unsustainable debt loads and serious productivity and competitiveness problems. And a fragmented European banking system remains one of the weakest links in the regional daisy chain.

Is this the “cure” that Abe really wants for Japan? The last thing that the Japanese economy needs at this point is backsliding on structural reforms. Yet, by forcing the BOJ to follow in the misdirected footsteps of the Fed and the ECB, that is precisely the risk that Abe and Japan are facing.

Massive liquidity injections carried out by the world’s major central banks – the Fed, the ECB, and the BOJ – are neither achieving traction in their respective real economies, nor facilitating balance-sheet repair and structural change. That leaves a huge sum of excess liquidity sloshing around in global asset markets. Where it goes, the next crisis is inevitably doomed to follow.

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CPL's picture

The whole world has gone mad.

flacon's picture

Yeah but at least it had a Keynesian "jump start". 2013 will be a year of growth (in the money supply). 

EnslavethechildrenforBen's picture

Animal, Vegetable, Mineral. Everything in Japan is either Glowing, Radiating or Mutating. Nothing in Japan will survive intact, the place is not habitable. Nothing there is worth anything. No amount of Mainstream hype can change that. Radiation has a half-life of thirty thousand years. Wake up sheeple

nmewn's picture

I suppose that makes us both

DoChenRollingBearing's picture

Nietsche claimed (I think?) that what does not kill you makes you stronger.

Nassim Nicholas Taleb has a new book out: Antifragile

You all may recall that he wrote The Black Swan (very influential book in 2007).  I have just started it, and have reached Page 48.  My first impressions of the word "antifragile itself, a word Taleb had to coin himself as it was in no language he could find...

Japan is a great example of a fragile place.  Who would be antifragile?


DoChenRollingBearing's picture

As my Latin was always very bad (lazy), I had to look that up.  

+ 1

Michaelwiseguy's picture

I really like the part of this video where Jackqueline Kennedy scoops up parts of JFK's skull and brains from the trunk of the limo and tries to put him back together, pieces of her husband's head with the car moving. (About 50 minutes into this video.)


P.S.: I was only 2 years old when this happened and murder cases have no expiration date.

President John F. Kennedy was the First President ever to been filmed live in color in all of history, being murdered right before your very eyes. That's pretty amazing.

EnslavethechildrenforBen's picture

@Michaelwiseguy you fucking Moron.

He was printing greenbacks and buying our (ass)ets back  from the Federal Reserve, like we should be doing now. If we the people don't start printing our own greenbacks and start buying our assets back from the Feds, pretty soon we will own nothing and they will own everything. Then we will all be their worker slaves. Especially if we let them have our guns.


n.d.v.'s picture

Somehow, Taleb managed to not find the word "robust" in any dictionary. Impressive.

DoChenRollingBearing's picture

Prologue, Page 8


"Robust Is Not Robust Enough"

Pareto's picture

Since 1990 or so, I'd say the Russians are the most anti-fragile.  No cradle to grave coddling going on there.  People gave up on the state looking after them long ago and have largely fended for themselves.  Poorly defined (non-existent)  property rights, lack of a constitution, a dysfunctional government, questionable rule of law, etc., hasn't stopped people from figuring shit out for themselves.  Resiliant.  The entire country has morphed into a state capitalist from of production and distribution, and the average citizen will take this over Marx anyday since state capitalism offers some window of hope, where Marx offers none.  Just ask Cuba.

ball-and-chain's picture

Japan has been playing this same game for close to 20 years.

They're on their second lost generation.

And one thing has always been constant--no matter how much they print.


America is on the same path.

We're a couple of gut-shot bears wandering aimlessly through the woods.

three chord sloth's picture

No... the whole world has gone soft and childish, that's all. Most want to believe that some magic formula will fix what ails us; that the right politician plus the right policy equals good times forever. And demagogues everywhere are willing to sell that snake oil to a spoiled and frightened public... who are more than willing to buy it by the bushel.

Dr. Sandi's picture

I'd like to point out that not the whole world has gone soft and childish. The places we call 'The Third World' have no nanny state to take care of them. So they are still self-reliant.

In other words, mano a mano, they could kick our butts. If only they could get a few decent meals in their bellies before the match.

akak's picture


In other words, mano a mano, they could kick our butts. If only they could get a few decent meals in their bellies before the match.

The problem here is, the average Western sheepizen would have to release their permament death grip on their latest e-gadget in order to free up their mano for the fight in the first place.

fonzannoon's picture

The USD is the worlds reserve currency and that is never changing. Quantitative easing has proven that no matter how much we try to debase our currency, the rest of the world still craves dollars. There is absolutely no negative consequences to printing money. Therefore the agenda going forward should be immediate debt forgiveness for everyone. An infusion of trillions of dollars will be given to each bank to buffer against the consequences of all loans being removed from their books. Each US citizen will be given an annual stipend of 50k/yr to be electronically deposited in monthly installments. Illegal immigrants will only be given 49.5k/yr because they need to suffer some consequences. With all debt paid off and citizens flush with cash interest rates can now go back to their traditional higher averages.  The growth that will take place after these measures will be mesmerizing. We will literally re write the history books.Let's Win the future!

CPL's picture

You are missing your /sarc tag.

fonzannoon's picture

I'm trying to convince myself it's possible.

CPL's picture

How's that working out so far?   

fonzannoon's picture

Not going to happen for me. I will just sit here with my beer at the beach and watch the ocean continue to recede. I'm sure it's nothing.

JungleJim's picture


 The sick thing is I personally know a lot of people who believe that. Many years ago I had a discussion with a woman who was on public welfare, 6 kids, public housing, food stamps the whole bit ... She says to me " I just don't understand why the goverment just doesn't write checks for everyone, then no one would have to work" That unfortunately is the kind of mentality and intellect we are dealing with.

americanspirit's picture

And let's have price controls too so that nobody can raise prices. That'll work.

hairball48's picture

Nothing has changed. Many welfare sheeples still believe that nonsense. 

Everyman's picture

How does YCS look?

fonzannoon's picture

I look at YCS a lot. Who the fk knows. It's like betting on two drunk guys racing backwards.

steve from virginia's picture



I dunno if Roach is talking about Japan or the US or Europe.


Central banks cannot succeed because problems have little to do with credit (except there is too much credit 'on the economies' books' already). The problem is extinguished capital and energy shortage which effects Japan (and Europe) more than these things effect some other countries.


The 'credit idea' has pretty much been played out. All the 'liquidity' that Roach talks about is borrowed. It has to be repaid with interest. People cannot repay now, they won't be able to repay the added liquidity, either. What comes next?


Time to shrink the economies so that earnings can occur. That means, get rid of the toys, live within means.


To do otherwise is to have the toys gotten rid of, for people to (be forced to) live within means.


What the Japanese establishment seeks to do is bring back the past ... to retrieve capital that was destroyed long ago ... that can never be retrieved.

VisualCSharp's picture

ROACH! We'll cut him off up ahead. DON'T GET PINNED DOWN!

linrom's picture

Yes and that's what elites want. They want to keep their toys but everyone else must live within their own means.

I am Jobe's picture

USSA is not far behind.

Jason T's picture

Destiny...ours quite frankly sucks.  

Peter Pan's picture

Everyone needs to relax a little. We just have to accept that at times there is a convergence of bad demographics, lousy leadership, clueless central bankers and trigger happy governments. Any one of these on their own can cause a disaster let alone all four at once. The high level of interconnectedness between world economies just ensures the loss of a relief valve and in fact magnifies the subsequent blow up.

Pharming's picture

"The high level of interconnectedness between world economies just ensures the loss of a relief valve and in fact magnifies the subsequent blow up."

This should also have an impact on recovery correct?  I hear many say that kicking the can down the road only delays the inevitable, I agree, those people also say that the collapse will be harder by delaying it...I agree, but I'm not sure I agree that the recovery out of the abyss will take longer in relation to the longer we wait.  If we are all tied together going down...will coming up out of it all be together? (hopefully not one world order) or some sooner than others?...  Once again...the $1 quadrillion question.

NoDebt's picture

How am I to assume a "relaxed" posture when I agree with everything you said?  :)

What we're doing now (and for the last 4 years, minimum) is using every policy tool in the book, plus some we just made up to try to stem what would surely have been Great Depression, Mark II. 

What is happening now is like living in a world where nobody every dies.  For a few years, it's nice that PopPop and Grandma are still around despite their old age and deteriorating health.  Gunshot victims don't die, but live through slow, agonizing recoveries.  The cancer wards pile up with patients who can't be cured but don't succumb to their illness.  Hospitals and other medical facilites are overwhelmed.  After a while you start to realize it's a curse, not a blessing. 

ANY sustainable economic model requires the possiblity of failure.  Remove that and things get twisted and distorted in ways no society as a whole can survive.

Rossalgondamer's picture



I would suggest however that Grandma and PopPop are quite dead, with QE slowly poisoning the living toward reunion.





Joe A's picture

"bad demographics, lousy leadership, clueless central bankers and trigger happy governments". Are these the four horsemen of the apocalypse?

q99x2's picture

Seems to me that if the Government is offering to hand you money, that you would not be so inclined to work but would rather send that money offshore and complain that it wasn't enough. Just thinking about what might come to my mind.

pragmatic hobo's picture

may you live in interesting times ...

fonzannoon's picture

I wonder if the guy who said that originally said "may you live in financial repression" and then  thought about it and did not want to be the guy at the party whoi bums everyone out.

Conman's picture

Hope Abe's got costco sized pepto bismol ready, its gonna be a bumpy ride.

Kastorsky's picture

this aggression will not stand, man

Never One Roach's picture

I disagree. The Fed should double its balance sheet again and hand out more free houses.

Joe moneybags's picture

Stephen Roach, whom I have followed for 14 years, is a brilliant writer, kinowlegable, intelligent, but always wrong about markets.  When writing for Morgan Stanley in NYC for years, he waxed on about the trade deficit, and proved seven ways from Sunday how it was unsustainable, and would be the catalyst for a market collapse.  His solid analysis and wisdom was out of sync with what the market was doing, and did.  Now, he is Mr. Asia Doomster, and will undoubtedly be too negative, on the Asian economies, and mis-time the market movements.

Hedgetard55's picture

Honest Abe will rescue Japan for sure. Money printing has saved many nations in the past, it will do so again re Japan and the USA.