Silicon Valley Bank’s ‘Swimming Naked’ Moment Is Spooking Japan

When Silicon Valley Bank (SVB) collapsed on March 10, 2023, after a run on deposits, it sent tremors through the U.S. banking system. However, those responsible for monetary policy in Japan were also paying attention. The BOJ’s decision not to raise rates for the last 20 years has kept Japan in a cycle of quantitative easing (QE), leaving the country vulnerable to a similar fate as SVB.

The Impact of Fed Tightening and Deregulation Bill

SVB’s downfall was due to a combination of factors. The deregulation bill former president Donald Trump signed in 2018 exempted SVB from stress tests. But the Fed’s aggressive tightening cycle also put pressure on the bank, revealing poor governance practices. In addition, as interest rates rose, SVB’s poor decision-making became evident, demonstrating the dangers of relying too heavily on QE.

Japan’s 20-Year Dilemma

Japan’s central bank was the first to slash rates to zero in 1999 and pioneered QE in 2000-2001. The BOJ has been trapped in QE ever since, with a fleeting effort to hike rates in 2006-2007. As a result, free money became part of the fabric of the economy, masking deeper structural issues. Two decades of QE have weakened Japan’s economy, discouraging innovation, restructuring, and risk-taking.

B OJ’s Trap and Kuroda’s Legacy

The BOJ’s reliance on QE has taken pressure off successive governments to tackle bureaucracy, labor market rigidities, and other issues. Moreover, Haruhiko Kuroda’s appointment in 2013 as the BOJ’s governor signaled a further ramping up of QE, which flooded the world with yen. This move propped Japan’s GDP and generated corporate profits thanks to a weakened currency. However, the Kuroda legacy is one of the lost opportunities, and the BOJ is left vulnerable to any sudden disruption in the global monetary system.

Related Facts

• SVB’s collapse was the worst U.S. bank failure since 2008.
• Japan’s GDP growth is expected to remain sluggish, suffering from a shrinking population, low productivity, and a highly regulated labor market.
• The BOJ’s refusal to raise rates for 20 years has kept Japan’s borrowing costs low, making it difficult for the government to manage its debts.

Key Takeaway

SVB’s collapse is a warning for countries relying too heavily on QE. It exposes the vulnerabilities of an economy that has been kept afloat by free money, potentially masking deeper structural issues. Japan’s prolonged QE has weakened the country’s animal spirits, discouraging innovation and obstructing risk-taking.

Conclusion

Japan’s 20-year reliance on QE has left the country vulnerable to shocks that brought down SVB. In addition, the BOJ’s reluctance to raise rates has kept borrowing costs low, making it harder for the government to manage its debts. A departure from QE would create short-term pain, but it could also liberate the country to tackle deeper structural issues.