Whatever else killed George Washington, the draining of more than a third of his blood in less than half a day would probably have done him in anyway. Well into the 19th century, bloodletting, as it was called, was the favored treatment of doctors for pretty much everything for two reasons: First, it was based on a generally accepted (though woefully wrong) idea of how the human body worked. And second, no one really tracked treatments’ success or failure rates.

The reason for this historical medical stroll is that current central bankers, for all their impressive-looking equations and studies, have more in common with those long-ago doctors than they would like to think. When bloodletting didn’t work, the remedy was often more bloodletting. To the modern central banker, the answer to just about everything that has gone wrong in the past couple of decades was looser monetary policy, by which they meant ever lower short- and long-term rates. But their theories, it turns out, have often rested upon shaky foundations and, in some cases, the evidence strongly suggests that rather than stimulating economic growth and inflation, their activities have done exactly the opposite. Nowhere is this more true than in Japan, despite the reassuringly avuncular certitude of Haruhiko Kuroda, the governor of the Bank of Japan.  

The BOJ stood pat again this week, though this was not a surprise: It hasn’t changed policy for years. Kuroda got his job in 2013 as the archer of Shinzo Abe’s third arrow: ultra-loose monetary policy. Not wanting to send short rates too negative, the BOJ started buying Japanese government bonds in 2013 and formalized this in 2016 with a policy of yield-curve control whereby it wouldn’t let 10-year yields rise above a set level, currently about 0.25%. It now owns more than half of all publicly issued government bonds. Under Kuroda, the BOJ also started buying stocks. It now owns about $430 billion of Japanese equities. Its balance sheet is now the equivalent of 135% of gross domestic product. No other top central bank has a balance sheet remotely this size compared with its economy.

Though I suspect that Abe’s assassination will have, if anything, increased the BOJ’s desire not to waver, there is no evidence that this frenetic activity has had the desired effect of stimulating activity and inflation. The recent pickup in Japanese inflation has been imported entirely. Domestically, the evidence suggests that the BOJ’s activities are making matters worse, not better. When central banks cut interest rates, the idea is that households and companies will spend more and save less, boosting activity. In fact, though, Japanese companies have continued to save at a similar rate, meaning that they invest less than their net profits. Much more strikingly, Japan’s household saving rate has climbed relentlessly. The only way that Japan hasn’t fallen into an economic black hole is because all this private saving is offset by huge government spending.   

Why might households have increased their savings? One reason is that Japan isn’t like economies in textbooks. It is, quite literally, the oldest country in the world and aging rapidly. The average Japanese citizen is pushing 50 and can expect to live to 85, though Germans and Italians aren’t that far behind. Moreover, the population is shrinking partly because Japanese families aren’t having enough children and partly because the Japanese aren’t that keen on foreigners. The evidence suggests that when interest rates are cut, the Japanese save more, not less. From this perspective, paradoxically, lower interest rates tighten monetary policy and higher interest rates loosen it. That explanation is at least consistent with what has actually happened rather than what the BOJ would like to have happened.

It gets worse. Alone among the top central banks, the BOJ has sat on its heels and done nothing to interest rates, and the yen has plummeted. Although Kuroda contended that the problem was a strong dollar, this simply isn’t true: The trade-weighted yen has fallen sharply over the past couple of years. Add the weak yen to vertiginous commodity prices, and the result is a huge terms-trade shock, crushed corporate margins and a chunky trade deficit. The only reason that Japan still has a current-account surplus is because it has such a large stock of overseas investments. I can’t see any of this reviving animal spirits.

All of this is remarkably visible and worrying, for sure. Less visible and more worrying is that Japanese policy makers don’t think that there are any costs to controlling financial markets to the extent that they do. Although the BOJ controls markets more than any other top central bank, all have gone down the same path and are only reluctantly and slowly shifting to another one. You don’t have to be fanatically pro markets to worry about this. Developed economies need more productivity growth, Japan’s more than most. We had, I thought, learned that, whatever their faults, markets are better allocators of capital than bureaucrats. Nothing the Bank of Japan and others have done in the past many years suggests otherwise.  

More From Writers at Bloomberg Opinion:

• What’s the Point of Hiking When Recession Looms?: Gearoid Reidy

• Japan’s Lack of Inflation Tied to Loose Policy: Richard Cookson

• BOJ Seems to Be Reveling in Obstinate Isolation: Moss & Reidy

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Richard Cookson was head of research and fund manager at Rubicon Fund Management. Previously, he was chief investment officer at Citi Private Bank and head of asset-allocation research at HSBC.

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