Business

Despite failed inflation target, Kuroda could get new term as BOJ governor, analysts say

by Tomoyuki Tachikawa

Kyodo

As the end of his current term approaches, Bank of Japan Gov. Haruhiko Kuroda could be in line to be reappointed for another five years, according to some analysts.

The BOJ formally announced late last year that it would not achieve its 2 percent inflation goal during Kuroda’s current five-year term, due to end in April 2018. The news dealt a setback to Prime Minister Shinzo Abe’s Abenomics policy mix intended to beat chronic deflation.

With the inflation target Kuroda’s signature policy, such an admission of failure might logically spell the end of his governorship.

But speculation is growing that Kuroda will stay in office after the ruling Liberal Democratic Party’s recent decision to extend its party president’s term limit to three consecutive terms, potentially allowing Abe to remain in power until 2021.

“The symbol of Abenomics is the duo of Prime Minister Abe and Gov. Kuroda,” said Jun Iio, a professor of politics at the National Graduate Institute for Policy Studies in Tokyo.

“Replacing Gov. Kuroda would mean the failure of Abenomics,” centering on the BOJ’s aggressive monetary easing, fiscal expansion and structural reforms, Iio added.

Since the new BOJ law came into effect in 1998 to strengthen the central bank’s independence from the government, no governor has served a second term. But the legislation does not rule out the possibility, stipulating the governor “may be reappointed.”

At a news conference after a two-day policy board meeting in November, Kuroda called it “regrettable” that the 2 percent inflation goal had not been met.

Kuroda has expressed eagerness to continue “strong monetary easing” measures, in contrast with other major central banks such as the U.S. Federal Reserve and the European Central Bank that are trying to phaseout accommodative policies.

The BOJ has loosened its monetary grip to unprecedented levels since Kuroda became governor in March 2013. His policies, including massive asset purchases, have been dubbed the “Kuroda bazooka” in the financial market.

In January 2016, the BOJ decided to apply a negative interest rate of 0.1 percent on some reserves it holds for commercial banks. In September that year, it adopted a “yield-curve control” policy, aimed at keeping the key 10-year government debt yield around zero percent by adjusting the amount of its bond buying.

Such policies have helped broaden the interest rate gaps between Japan and other advanced economies and thus triggered the depreciation of the yen, which pushes up import prices in Japan.

As global energy prices are also on an upward trend, the year-on-year change in Japan’s core consumer price index in January, excluding volatile fresh food prices, turned positive for the first time in 13 months.

The rate of the core CPI rise, however, was only 0.1 percent, far from the central bank’s 2 percent target.

Earlier this year, Abe said during a Diet session that he hopes the next BOJ governor will “steadily promote Mr. Kuroda’s path,” indirectly urging the central bank not to rush to taper its large-scale monetary easing.

Japan has a bitter history of monetary policy change. In August 2000, the BOJ scrapped the zero-interest-rate policy despite strong opposition by government officials and politicians.

Within less than six months, the bank was forced to introduce quantitative easing, an unconventional monetary policy of printing money while buying government bonds from the market, to grapple with economic deterioration.

“Mr. Kuroda is certain to continue with bold monetary easing,” said Takeshi Minami, chief economist at the Norinchukin Research Institute. “With Mr. Abe still pursuing monetary easing, Mr. Kuroda is likely to be asked to stay on.”

Indeed, Abe has urged the BOJ to maintain its current drastic monetary easing for the time being.

“Internationally and theoretically, monetary policy is most influential on prices,” Abe said during a Diet session in March.

Other financial experts, however, believe Kuroda is likely to give up the BOJ governorship as he has already lost the trust of market participants with the central bank pushing back the time frame for its inflation goal four times under his current term.

Even if Abe requests the reappointment, Kuroda might say no, given he is already 72 years old.

If Kuroda were to reject a new term, it would pave the way for Finance Ministry bureaucrats and BOJ executives to take the post.

Candidates include BOJ Deputy Gov. Hiroshi Nakaso and BOJ Executive Director Masayoshi Amamiya, who is referred to by some traders as “Mr. BOJ.” Both have been engaged in policymaking on Kuroda’s team.

Among others are former top bureaucrats at the Finance Ministry — Yasutake Tango and Eijiro Katsu.

Japanese Ambassador to Switzerland Etsuro Honda, a key architect of Abenomics, is also seen as a candidate. He is known as a reflationist who supports boosting the economy by increasing the money supply.

“I don’t know what will happen to me, but I think a person who will follow Gov. Kuroda’s policies and can conduct policies in a flexible manner should become his successor,” Honda said in January.

Kuroda, a former Asian Development Bank president, was first appointed to head the BOJ for the remainder of his predecessor Masaaki Shirakawa’s five-year term until April 8, 2013. Shirakawa resigned from the post on March 19 that year.

In April 2013, the Diet approved the government’s appointment of Kuroda for a five-year term.