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Kuroda’s Second Chance

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Kuroda’s Second Chance

The Bank of Japan’s governor gets a second term, and more time to achieve an elusive inflation target.

Kuroda’s Second Chance
Credit: Flickr/ World Economic Forum

Haruhiko Kuroda’s reappointment as governor of the Bank of Japan (BOJ) has given the 73-year-old another chance of achieving his stated 2 percent inflation target. Will the second time be the charm for Kuroda and the central bank?

On March 16, Japan’s parliament formally approved Kuroda’s nomination for a second five-year term from April, and also two new deputies, BOJ executive director Masayoshi Amamiya and Waseda University professor Masazumi Wakatabe.

Both new deputies are seen as supportive of Kuroda’s ultra-loose monetary policy, under which the central bank has bought an estimated 40 percent of outstanding Japanese government bonds (JGBs) and pushed official interest rates into negative territory.

Market watchers have generally welcomed Kuroda’s reappointment as signaling further policy stability. Prior to Kuroda’s appointment in 2013, the central bank was criticized for flip-flopping over policy, including a premature tightening in 2000 blamed for prolonging deflation.

“From the market’s perspective, it’s quite good as we already know Kuroda and what he says can be quite easily understood,” Nikko Asset Management’s (Nikko AM’s) chief strategist, Naoki Kamiyama told Pacific Money.

“Kuroda has said he likes to surprise people with positive news like his ‘bazooka’ positive surprise, but when he wants to normalize monetary policy, he won’t surprise us. That’s why communication is quite smooth and we won’t be surprised too much.”

Yet despite Kuroda’s initial policy “bazooka” that sent the Japanese yen falling and stocks surging, two prior decades of deflation have proven tough to overcome. The original pledge in 2013 was to hit the 2 percent inflation target “in about two years”; the goal remains stubbornly out of reach amid a general downturn in consumer prices among developed economies.

In January 2018, while Japan’s headline consumer prices rose by 1.4 percent, their highest rate in more than three years, the BOJ’s favored measure of underlying inflation, excluding fresh food and energy prices, edged up by just 0.4 percent.

SMBC Nikko Securities chief economist Yoshimasa Maruyama told Kyodo News that the 2 percent goal was “nowhere in sight,” with the effects of higher oil prices increasing inflation likely to “gradually dissipate” in 2018.

At its latest policy board meeting in January, the BOJ kept its short-term policy rate unchanged at negative 0.1 percent and its 10-year yield target at zero, while reiterating its commitment to buy 80 trillion yen ($755 billion) worth of JGBs per annum. Board members “shared the recognition” that the consumer price index would hit the 2 percent target “around fiscal 2019” on the back of a reduced output gap and rising inflation expectations.

Commenting on the BOJ’s target, Kuroda recently told reporters that “dispelling the deflationary mindset is taking time, and this is why we have been unable to realize the 2 percent price stability target.”

According to Kuroda, Japanese businesses have started raising wages and prices more seriously, leading to the target being achieved by around the end of the decade.

Kuroda’s suggestion to the Diet on March 2 that the central bank could start thinking about an exit from its ultra-easy policy in 2019 caused a spike in the exchange rate and bond yields.

“Right now, the members of the policy board and I think that prices will move to reach 2 percent in around fiscal 2019. So it’s logical that we would be thinking about and debating exit at that time too,” he said.

“I’m not saying that the negative rate of 0.1 percent and the around 0 percent aim for 10-year bond yields will never change, but it is possible. We will be discussing that at each policy meeting.”

‘Loose For Longer’

However, Capital Economics suggests that sluggish wage growth, subdued inflationary expectations, and recent renewed strengthening of the exchange rate will keep inflation below the BOJ’s target “for the foreseeable future.”

“The recent strengthening of the yen will keep a lid on consumer goods inflation. What’s more, the government intends to lift the sales tax next October, which will weaken domestic demand and reduce price pressures,” senior Japan economist Marcel Thieliant said in a March 9 report.

“More generally, the bank has had little success in lifting expectations of future price gains among households and firms. As a result, wages are barely rising even though the labor market is exceptionally tight.

“If the bank decides to tighten policy in the near future, it will be because of concerns about financial stability rather than because of stronger price pressures.”

The result will be the BOJ keeping policy “loose for longer,” Thieliant concluded.

Nikko AM’s Kamiyama also anticipates a continuation of current policy, barring an economic shock such as a steep decline in U.S. demand or geopolitical shock. The Tokyo-based analyst sees official interest rates at the “longer end” reaching 0.25 percent by March 2019, with the CPI climbing to around 1 percent.

“Calendar-wise, I’d say the October to December quarter for a change in BOJ policy, depending on the CPI numbers, in line with better economic conditions,” he said.

In contrast, rather than a policy tightening, WisdomTree Japan’s Jesper Koll has argued that another “Kuroda surprise” could be possible amid expected weaker economic data ahead.

With the new BOJ policy board holding its first meeting on April 26, the Tokyo-based economist said the so-called “dovish” faction could gain momentum, including the new deputy governor Wakatabe. Koll points to slowing bank credit and residential housing starts, along with a potential “Tankan shock” in April of weaker business conditions.

“If, as we suspect, the major Tankan indices drop by more than five or six points, BOJ governor Kuroda will come under growing pressure to counter economic down cycle risks,” Koll said in a March 7 report.

This is particularly the case ahead of Japanese Prime Minister Shinzo Abe’s upcoming re-election as party president, scheduled for September, with Abe wanting to avoid a downturn “at all costs.”

“Globally, the call for a coordinated and synchronized ‘exit’ from monetary stimulus has become deeply entrenched as the main story-line for markets, i.e. both Japan and Europe will follow the ‘beautiful exit’ led by the [U.S.] Federal Reserve. This makes sense as long as the synchronized economic up cycle persists, as it did very powerfully last year (2017). But as soon as growth cycles de-couple, so will monetary policy,” Koll said.

“All said, we think that Japan’s policy debate will be forced to refocus on the need for added pro-growth policy as the visibility of real economy down cycle risks are poised to grow in coming months. Unless the data inflects decisively upward in coming months, the probability of another pro-growth ‘Kuroda surprise entry’ is getting higher than the probability of an ‘exit’.”

A recent Bloomberg survey of 49 economists found less than a third expect the BOJ to tighten policy in 2018, down from half in the last poll in January.

For its part, the BOJ has stated that it would continue monetary expansion until inflation exceeds 2 percent “and stays above the target in a stable manner.”

With the world’s third-largest economy currently enjoying its longest growth streak in 28 years, unemployment at two-decade lows, and wages finally rising, prospects are improving for the stronger domestic growth necessary for an inflation uptick. Yet on the horizon looms the proposed increase to the consumption tax in 2019, with previous such hikes having dragged the economy back into recession.

Kuroda has also stated that wages would need to increase by around 3 percent a year to reach his inflation target. While wages of “irregular” part-time workers have risen by more than 2 percent a year recently, wage hikes for “regular” workers have been far more modest.

And with “Abenomics” now threatened by a political scandal over the sale of state-owned land to a private school operator, the BOJ will face even more pressure to carry the burden of boosting growth.

Kuroda might need all of his next five years to finally hit the target and to make an exit from ultra-easy policy. But after the repeated failures of his predecessors, few would begrudge him another shot.