In late January 2016, the lights were on well past midnight on the seventh floor of the Bank of Japan’s headquarters. Inside, a handful of bureaucrats were working on a shock plan.
It was almost three years into central bank Gov. Haruhiko Kuroda’s audacious campaign to jolt Japan out of nearly two decades of deflation — and things were not going well.
The world’s third-largest economy had been weak. Prices were flat. A strengthening yen was hurting exporters. And the stock market was falling. The small band of bureaucrats was trying to persuade the bank’s nine-member board, which sets monetary policy, to approve a radical step: negative interest rates. The idea was to charge commercial banks for depositing their cash with the central bank, rather than pay them interest on it, and thus push them to lend or invest their money in a bid to spur growth.
Convincing skeptics on the board to embrace negative rates wasn’t easy, according to previously unreported accounts of the events on that fateful night. The policy had been studied for years in Japan but shunned as too controversial. On the brown-carpeted eighth floor of the BOJ building, bank bureaucrats visited the offices of swing voters on the board to make the case. A panel on the eighth floor lights up in red to show whenever a board member has visitors. That night, the lights stayed on “for hours and hours for some of them,” one person said. “You could see there was heavy lobbying going on.”
The shift to negative rates was carried by a narrow 5-4 vote. Almost immediately, it was clear within the BOJ that the move was a mistake. It crushed long-term interest rates, didn’t weaken the yen as hoped and angered commercial bankers, who felt blind-sided by a policy that crimped their profits. In retrospect, the move marked the death knell of “Kurodanomics,” as the governor’s plan for reflating the economy became known. In the most detailed account of these efforts, reported here, BOJ technocrats went to work tiptoeing back Kuroda’s radical program.
Three years on, there is a broad consensus that Japan’s experiment in shock-and-awe monetary policy has failed. An intense debate is underway within the BOJ over why Kuroda’s assumptions about how he could fundamentally change the trajectory of the economy proved wrong and what the bank’s next steps should be. The picture that emerges is of a central bank under pressure and at a moment of reckoning.
The BOJ declined comment for this story.
Kuroda, 74, was hailed as something of a monetary policy rock star by Wall Street when he became governor in 2013. He was seen as the man with the boldness needed to end Japan’s prolonged and debilitating bout of deflation — a general fall in the price of goods and services that began in the 1990s. Deflation has stopped. But because Kuroda failed to get close to the BOJ’s 2 percent inflation target through his massive monetary easing, some BOJ insiders say his authority in the central bank is diminished, giving the bureaucrats greater influence in shaping policy.
At its core, the tension at the BOJ is between traditionalists, led by Deputy Gov. Masayoshi Amamiya, 63, who fear the rising costs of prolonged easing, and blow-it-all-up-again policy radicals, who argue that to boost inflation, Kuroda’s revolution should be taken even further by printing money to finance government spending.
The governor has pushed back on proposals from both sides in public and in private, according to BOJ insiders, arguing that the central bank is already doing enough to drive up prices and that the rising cost of prolonged easing is manageable. But with the bank having pushed back its timing for meeting the price target multiple times, his voice now carries less weight.
This account of Kuroda’s attempt to defeat Japan’s deflationary mindset is based on interviews with more than 30 incumbent and former BOJ officials, including board members, as well as lawmakers in contact with the central bank, Finance Ministry officials and aides to Prime Minister Shinzo Abe. Many spoke on condition they not be named. Kuroda declined to be interviewed.
The reckoning for the BOJ has implications for the U.S. Federal Reserve and the European Central Bank, both also struggling to unwind policies put in place to contend with the fallout from the 2008 global financial crisis. The trade war between the United States and China is hurting global growth, putting major central banks under pressure to ramp up stimulus rather than roll it back. The Fed is now examining the BOJ’s policies in search of tools it can deploy when the next crisis hits.
The direction taken by the BOJ could determine whether Japan’s banking sector avoids a hard landing and whether Abe or his successor will lean on the central bank to take the most extreme step remaining: printing money for the explicit purpose of financing a national debt that is now more than twice the size of the economy. That could risk a costly downgrade by credit rating agencies for Japan, and, by extension, Japanese corporate borrowers.
The spurning of Kurodanomics also has political implications. It is part of a broader public dissatisfaction with what has been labeled Abenomics — the prime minister’s plan to reflate the economy out of prolonged stagnation through a combination of aggressive monetary easing, bold fiscal spending and fundamental structural reforms in the economy.
“Kuroda’s radical stimulus kept interest rates low, allowing politicians to delay reforms to get Japan’s fiscal house in order,” said Koichi Haji, executive research fellow at NLI Research Institute. “The foot-dragging could cost Japan dearly. The options left for the BOJ all seem extreme.”
In some ways, Japan’s rejection of Kurodanomics is a consequence of inflated expectations. True, the BOJ hasn’t reached its 2 percent price target. But even some critics of Kuroda concede he scored one resounding success: His stimulus wiped out the economic gloom that had been suffocating Japan before he arrived on the scene. Since 2013, the economy has expanded 6.8 percent after years of stagnation. The jobless rate fell to 2.4 percent in April, a level considered near full employment.
Supporters of Kuroda’s policies also point to their critics’ inability to offer better alternatives. When he took over six years ago, the BOJ had effectively been keeping interest rates at zero for more than a decade to fight deflation, without any success. Kuroda may not have achieved his inflation target, but his policies did stimulate growth, most analysts agree.
“Kuroda’s policy succeeded in reflating the economy and creating an environment where Japan was no longer in deflation. That is Kuroda’s biggest accomplishment,” said Tomoyuki Shimoda, a former BOJ official who is now a professor at Hitotsubashi University. “But you need to keep adding fuel to keep the rocket flying. That has proved quite challenging.”
Firing a ‘bazooka’
In the early 1990s, the economy was rocked when the property bubble burst, triggering a domestic banking crisis and years of economic malaise. In the two decades that followed, Japan suffered from grinding deflation. Companies and households withheld spending on the assumption that prices would keep falling — things would be even cheaper tomorrow. Prodding firms to raise wages and boost investment became a challenge for the BOJ as companies stuck to a deflationary mindset.
Even before Kuroda became governor in 2013, the BOJ had deployed various unconventional policies — such as zero interest rates and “quantitative easing” — in an effort to end deflation and spur growth. But they were taken incrementally, in the belief that doing so would leave the central bank room to fine-tune policy if the therapies did not work.
Kuroda changed all that. Decrying the BOJ for doing too little, too late, he swept into the bank in 2013 with a bold prescription for change, which became known as a monetary “bazooka.” At its core was a version of the quantitative easing, or massive asset purchases, that the Fed used to pump money into the American financial system during the 2008 credit freeze — but on steroids. Under a program dubbed “quantitative and qualitative easing,” the BOJ would double its purchases of government bonds and riskier assets such as exchange-traded stock funds to achieve 2 percent inflation by 2015.
Overseas investors offered rave reviews. Many went on to ride what became a more than 70 percent rally in the 225-issue Nikkei average between Kuroda’s announcement of QQE and mid-2015. “Kuroda’s monetary policy drew global attention as a big social experiment and a sign that Japan was finally doing something bold to beat deflation,” said Masaaki Kanno, who was chief economist at JP Morgan Securities at the time.
It hasn’t worked. The BOJ has postponed the projected timing for hitting its inflation target six times since 2013. When Kuroda was re-appointed for another five-year term starting in April 2018, the bank dropped the time frame. In April this year, the BOJ conceded that inflation will miss its 2 percent target at least through March 2022.
Now, the BOJ has begun studying why Kuroda’s experiment failed to achieve its goal. One hypothesis focuses on how the central bank’s best economic minds underestimated the power of technology to suppress wages and prices. The argument — referenced by Amamiya and others — is that the BOJ misread the capacity of companies to find ways to use automation rather than hire new workers or pay already scarce workers more.
While some who have worked with Kuroda praise him, as one former colleague puts it, as a “quick decision-maker with an extremely sharp and logical mind,” government officials and ruling party lawmakers who interact regularly with the central bank say his repeated failure to hit the inflation target has strained his credibility.
“Stubborn” is another word some of Kuroda’s colleagues use to describe him. From the start, he has argued that the only way to lower real interest rates when borrowing costs were already so low was to jump-start inflation expectations.
Even as Kuroda has clung to that view, an influential cadre of career officials led by Amamiya has spent the last three years trying to contain the unintended side effects of Kuroda’s policies without spooking the markets, according to officials with knowledge of those deliberations. Amamiya declined to be interviewed for this article.
“What was supposed to be a quick-hit effort to push up inflation turned out to be a protracted battle, so a new game plan was necessary,” said one of the officials. “The key was to come up with ways to address the side effects, without giving markets the impression the BOJ was in full retreat.”
The Oxford-educated Kuroda is a BOJ outsider, having spent time as the No. 2 civil servant at the Finance Ministry and eight years as president of the Asian Development Bank in Manila. Former Finance Ministry colleagues say that on long flights to international meetings, he was often engrossed in books on topics including philosophy and economics, while they were having a drink.
Amamiya, a fan of classical music who plays the piano and guitar, is a career-long BOJ official, the consummate insider. Known in financial circles as “Mr. BOJ,” he has sought to steer the bank away from its policy of unprecedented asset-buying and negative interests rates — all features of a program he helped put in place.
He has spent most of the past two decades at the BOJ’s Monetary Affairs Department and cultivated a reputation for developing close ties to lawmakers and business leaders. He has used those contacts to understand which way the political winds are blowing, associates say. Other senior career officials have gravitated to Amamiya, viewing him as a like-minded ally — someone, like them, who would be coping with the fallout from Kuroda’s experiment for years after the governor has gone. Amamiya is now widely seen inside the BOJ and in political and financial circles as a potential successor to Kuroda.
At the outset, though, the two men agreed on a fundamental point: People close to Amamiya say he has long been a fan of heavy money printing by the central bank. That philosophy soured Amamiya’s relationship with the prior BOJ governor, Masaaki Shirakawa, who was cautious of big-bang stimulus. Shirakawa declined comment.
Amamiya seemed to get along better with Kuroda. The governor needed the expertise of Amamiya in drafting policy and so put him in charge of formulating monetary plans. Kuroda was the star frontman promoting QQE to the world. As Kuroda’s key lieutenant, Amamiya looked after the details. It was a win-win, until inflation failed to pick up sufficiently. While Kuroda insisted that the BOJ stick to its ultraeasy policy until 2 percent inflation was achieved, Amamiya and the technocrats were becoming less sure. They fretted over the cost of prolonging a stimulus that was intended as a quick-hit solution to beat deflation.
The public backlash against the announcement of negative rates in January 2016 was unforgiving. Tabloid headlines suggested savers could be charged for keeping money in their private bank accounts. That wasn’t accurate: The policy was calibrated, targeting only a portion of commercial banks’ holdings at the BOJ. But for the public, that nuance didn’t register. Sales of safes as an alternative to bank deposits boomed. TV news shows that had scarcely covered the BOJ ran features on the threat to savers and pensions in a rapidly aging society.
For the first time, the BOJ — long bashed for doing too little and too late — was being criticized for being too radical. Kuroda was summoned almost daily to the Diet by angry lawmakers. One of those, opposition lawmaker Mikishi Daimon, published his own critique of Kuroda last year in a book titled “Casino-mics.”
The backlash ruled out a move to deeper negative rates, and the rollback of Kuroda’s agenda began.
It fell to Amamiya to repair the fallout from negative rates, which did little to boost bank lending. He instructed his staff to craft a face-saving solution. Eight months after the unpopular move to below-zero rates, the BOJ adopted so-called yield curve control. The plan paired the below-zero short-term rate with a target of a 0 percent yield for 10-year Japanese government bonds — which Japan’s banks hold in vast quantities. The differential between the two rates ensured at least a sliver of a lending margin for banks.
YCC meant the BOJ was shifting its focus from the pace and volume of money being printed to its traditional target of interest rates — or the cost of borrowing money. Simple explanations on a board with bold red figures for easy viewing in news conferences were replaced by complex footnotes in BOJ policy announcements that financial professionals struggled to understand. It was a reversal of many things that made Kuroda’s bazooka unique — the huge asset buying and simple communication.
“The switch to YCC meant Kuroda’s bazooka was over,” said one official with knowledge of BOJ policymaking. It also shifted the policy controls from Kuroda to the career bureaucrats, the official added.
The BOJ could gradually taper off its bond purchases, as it no longer committed to buying at a set pace. If the economy improved, it could even begin raising rates. “In a way, negative rates were the last policy with a remnant of Kuroda-ism,” one BOJ official said.
In another change, Kuroda began to discuss the side effects of BOJ policy, notably the damage from years of ultralow rates on banks. Banks typically earn profits by procuring cheap short-term funds and lending long-term at higher rates. The BOJ’s policies have squeezed long-term yields, narrowing banks’ margins to the extent of stoking concerns over the viability of some of the weaker regional banks.
In a June 2017 speech at Oxford — where he studied economics in the early 1970s — Kuroda conceded that firing up inflation expectations with money printing alone was more difficult than he initially expected. In July, the BOJ pushed back the timing for hitting its inflation target for the sixth time. Having peaked at 1.5 percent in April 2014, consumer price inflation had slumped to 0.5 percent that month.
Kuroda appeared to throw in the towel in November with a speech in Zurich. To the assembled academics, Kuroda began discussing the concept of interest rates so low that they would hurt, not help, the economy. The talk was meant as a trial balloon, intended to see how markets would react to the hint of normalization. It worked, sparking market speculation that, like the U.S. and European central banks, the BOJ was looking to step back from crisis-mode monetary policy.
“The BOJ was clearly heading for an exit,” said a former top Finance Ministry official who knows Kuroda. “But they kept the message very subtle for fear talk of an exit could trigger an unwelcome yen spike.” If markets thought interest rates in Japan were going to rise, that would make the yen an attractive currency for investors and push up its value.
In laying the groundwork for a future exit, Amamiya worked closely with board members who had grown cautious of Kuroda’s policies, according to current and former central bank and government officials with knowledge of BOJ decision-making. But a fragmented board made the task challenging. Among the nine members, three were opposed to any attempt to unwind stimulus, including Deputy Gov. Masazumi Wakatabe, a vocal advocate of aggressive easing. The BOJ declined a request to interview Wakatabe.
A compromise was reached in July last year: The BOJ would allow bond yields to move more flexibly. The BOJ also gave itself more flexibility in how much it buys in stock index funds. But that was as far as Amamiya and the career officials could push. They sought twice to prepare a plan to raise rates in 2018, but abandoned the effort due to unexpectedly weak inflation and volatile markets.
Banks have lobbied energetically against Kuroda’s policies. Under Kuroda, the BOJ has flooded the economy with so much cash that the average interest rate on new loans has cratered, cutting the banks’ margins. Big banks have shuttered branches, while smaller banks have struggled to merge.
Under pressure, some banks are scrambling to diversify. One remarkable example: In western Japan, Yamaguchi Bank says it is renting out space at one of its branches for a wine bar that is slated to open next month. The bet is that diners might also open an account or take out a loan, the bank says.
In April, the BOJ issued a warning for the first time in almost three decades that financial institutions were at risk of overextending loans to real estate borrowers as they chased returns.
Abe’s administration is now downplaying Kuroda’s inflation target, having initially backed it enthusiastically. Asked for comment, the Cabinet Secretariat directed Reuters to remarks Abe made in the Diet in March. He said the central bank’s policies had helped create jobs, and that the government hoped the BOJ would continue to make efforts to achieve its inflation target.
Whether Amamiya succeeds in steering a pullback of Kuroda’s policies remains uncertain, given the divergent views in the bank. In April, the BOJ set a time frame on how long it would keep ultralow rates in place, pledging to do so for at least one more year. That was a walk back for BOJ bureaucrats who wanted more flexibility in their exit plans.
And it’s getting tougher to tighten. With fears of a recession growing as the U.S.-China trade war intensifies, many central banks are pausing in their attempts to raise rates. Some are even cutting.
The BOJ faces a predicament: Having fired Kuroda’s bazooka, it has little ammunition left to spur growth in the event of an economic downturn.
“The BOJ will likely have to ponder additional easing at some point,” ex-BOJ Deputy Gov. Hirohide Yamaguchi said. “But its monetary policy toolbox is quite small after undertaking so many radical stimulus measures.”