Currency veteran offers BOJ credibility on reflation

Parties ready to OK Abe's choice to head central bank

by John Brinsley

Bloomberg

The Bank of Japan may pack a bigger punch under Haruhiko Kuroda, an opponent of deflation who ran the nation’s currency policy and then built an international reputation leading the Asian Development Bank.

Finance Minister Taro Aso told reporters Monday that Kuroda, Prime Minister Shinzo Abe’s pick as BOJ governor, would be the “correct” choice as next BOJ chief, noting an international finance background. Kuroda, 68, was in charge of foreign exchange issues at the Finance Ministry from 1999 to 2003.

Kuroda would need to be confirmed by both houses of the Diet should Abe nominate him. The Democratic Party of Japan, the largest party in the Upper House — where the ruling Liberal Democratic Party lacks a majority — is reportedly ready to approve Abe’s selections.

The LDP-New Komeito ruling coalition agreed Tuesday to hold an Upper House vote on March 15 on whether to approve Kuroda as the next central bank governor, party sources said.

The voting in the chamber on nominees for BOJ chief and the two deputy governors will come a day after the Lower House votes on the candidates, the sources said.

Abe is likely to tap Kikuo Iwata, an academic who has urged a ramping up in Japan’s monetary base to end deflation, and senior BOJ official Hiroshi Nakaso, as deputy governors, according to one government official and a ruling coalition executive, who asked not to be named as the talks are private.

LDP Diet affairs chief Ichiro Kamoshita said the government is expected to propose the nominations to the Diet on Thursday or Friday.

While departing BOJ Gov. Masaaki Shirakawa established a ¥76 trillion asset-purchase fund and an unlimited bank-loan financing program, he failed to encourage inflation expectations, instead warning repeatedly about the dangers of excess stimulus. By contrast, Kuroda called for an inflation target a decade before the bank agreed to one in January, and for years has spoken in favor of quantitative easing.

“He’s the right person to enhance the role of communication strategy at the Bank of Japan,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo and a former head foreign exchange dealer at the BOJ. “He has already said in press interviews that the 2 percent inflation target should be achieved in two years — this is a very important message to the market.”

Investors welcomed the nomination reports, with the yen on Monday reaching its lowest level against the dollar since May 2010 on prospects for more stimulus. It later rallied amid safe-haven demand stemming from concern that Italy’s election failed to produce a majority winner.

The benchmark Nikkei 225 stock average closed at the highest level in almost 4½ years Monday, when five-year bond yields fell to a record 0.12 percent, amid forecasts the BOJ will start purchasing longer-dated securities.

For Kuroda, heading the BOJ would cap a 45-year career that includes a temporary transfer to Washington with the International Monetary Fund, a stint as adviser to former Prime Minister Junichiro Koizumi and a master’s degree from Oxford University.

Born in Kyushu in 1944, Kuroda entered the Finance Ministry in 1967 after graduating from the University of Tokyo with a degree in law. As a young bureaucrat, he was sent to Oxford, where he studied economics under Nobel Prize winner John Hicks.

Kuroda said in a 2006 interview with the IMF that at Oxford he was taught that “although economic theory may provide some insight, some framework, good policies may require something that goes beyond just economy theory or analysis — some practical judgment, some good sense.”

His dream was to be a teacher, according to the IMF profile, an objective he fulfilled for a time as a professor at Tokyo’s Hitotsubashi University after he left the Finance Ministry in 2003. While at the ministry, he wrote a paper titled “Socrates: The Dollar Dialogue,” in which the ancient Greek philosopher muses on the efforts by international policymakers to manage foreign exchange rates.

Kuroda rose to become vice finance minister for international affairs, the senior official in charge of foreign exchange issues, from 1999 to 2003. He succeeded Eisuke Sakakibara, who was known as “Mr. Yen” for his ability to influence the currency markets with his comments.

It was in the capacity as currency policy chief that Kuroda honed his sense that monetary policy ought to be deployed more forcefully against what at the time were the first years of Japan’s deflation. Consumer price declines started in the late 1990s as banks constricted lending, seeking to fix balance sheets mauled by the destruction of burst bubbles in the stock and real estate markets.

He wrote a 2002 opinion piece, along with colleague Masahiro Kawai, urging the BOJ to adopt a 3 percent inflation goal and to continually increase the monetary base through asset purchases. Kuroda also oversaw bouts of foreign exchange intervention, selling yen as the currency appreciated.

“Kuroda has certainly been out there for a decade saying more could be done by the Bank of Japan, so he’s got credibility,” said Richard Jerram, chief economist at Bank of Singapore Ltd. “The requirements of what they need to do has been made clear. The outcome is going to be large-scale purchases of Japanese government bonds.”

Kuroda explained in an interview this month that falling prices exacerbate real debt burdens, and give the incentive to companies and households to postpone spending. Consumer prices excluding fresh food fell 0.2 percent in December. The price gauge hasn’t advanced 2 percent for any year since 1997, when the consumption tax was hiked to 5 percent from 3 percent.

Leading the ADB since 2005, Kuroda has had a seat at international economic gatherings and observed from abroad how the BOJ for years resisted establishing an inflation target. Shirakawa and his colleagues on the current board took the step of setting a 2 percent goal last month, acting weeks after the election of Abe on a platform of reflation.

Shirakawa, 63, sought to damp down impulses to press the central bank into extraordinary easing in the aftermath of the March 11, 2011, megaquake and tsunami, warning that any move to underwrite government debt would lead to sharp inflation and damage to people’s livelihoods.

The ADB chief, who enjoys swimming and reading detective novels in his spare time, has overseen a tripling in the Manila-based development lender’s capital base, to $165 billion, and enlarged its lending window for the cheapest loans to members.

Should he win the BOJ post, he will be tasked with implementing Abe’s vision for aggressive monetary easing and communicating it to global leaders concerned about the impact on a falling yen.

In a Feb. 11 interview, Kuroda advocated additional stimulus this year, saying the central bank has “really substantial room for monetary easing.” He also said that the global standard for achieving inflation targets was a two-year time horizon. When the BOJ set a 2 percent inflation target without a deadline in January, it said it would start open-ended asset purchases starting in 2014.

The government bond yield curve is pricing in Kuroda’s success in adopting more aggressive easing while failing to reach 2 percent inflation. The extra yield investors demand to hold 30-year JGBs instead of five-year notes slid to 1.78 percentage points from the seven-year high of 1.86 earlier this month, reflecting speculation of increased BOJ debt purchases and that the buying will do little to spur consumer prices.

The yen has weakened more than 11 percent since the LDP regained power in December, vowing to push the BOJ to boost stimulus. Group of 20 finance ministers this month signaled support for Japan’s policies as long as Abe’s policymakers end any public endorsement of a declining currency.

Abe has retained the threat of changing the law governing the BOJ should the central bank fail to meet inflation targets, raising the risk of diminishing the institution’s independence. Even so, by burnishing the bank’s reputation, that may be less of a danger under Kuroda.

“The issue isn’t independence, the issue is accountability,” said Robert Feldman, head of Japan economic research at Morgan Stanley MUFG Securities Co. “Kuroda has to go back to the international community to win back its trust, and I think he will. I can’t think of a better candidate to head the BOJ.”

Kuroda must now implement what he has advocated in bringing Japan out of its deflationary spiral.

“He is an excellent choice,” retired Yale University professor Koichi Hamada, a member of Abe’s brain trust who has advised the prime minister on the BOJ nominations, told reporters Monday in Tokyo. “He understands ‘Abenomics’ well.”

Information from Kyodo added