Haruhiko Kuroda clearly has William McChesney Martin on the brain.

Bank of Japan Gov. Kuroda disappointed markets Friday with a half-hearted increase in asset-buying programs. His move to boost purchases of exchange-traded funds by $58 billion fell way short of hopes for another monetary bazooka. Not by neglect, but as per Martin’s advice. Martin was Federal Reserve chairman from 1951 to 1970, during which he said his job was to “take away the punchbowl just as the party gets going.”

Central banks the world over have long forgotten that their role is that of monetary bartender. None more so than Kuroda, who’s been refilling the punchbowl and daring bankers, investors and businesses alike to keep up. On Friday, Kuroda remembered that his job comes with a modicum of responsibility — and sobriety — and essentially yelled “last call!” when he resisted calls for yet another a big easing move.

It’s hard to candy coat the angry how-dare-you phone calls Kuroda will be getting in the days ahead from Prime Minister Shinzo Abe’s team. But Kuroda is right to cut off government officials and investors getting drunk from his liquidity. Where, after all, has it gotten Asia’s No. 2 economy? Wages are stagnant, deflation is deepening, Japan’s competiveness is falling and Abe hasn’t implemented one single notable structural reform to hasten growth and raise living standards.

What mixologist Kuroda is telling Abe is that it’s time to sober up and get to work. Earlier last week, Abe announced a giant $265 billion stimulus package that, frankly, won’t revive growth, wages or confidence beyond the next two months. That’s exactly Kuroda’s point. For 25 years now, the BOJ and the Finance Ministry have been adding monetary and fiscal uppers to enliven a rigid and bloated economy that barely responds.

Abe arrived on the scene three-and-half-years ago with a robust structural-reform push. He pledged to increase innovation, cut bureaucracy, tighten corporate governance, boost productivity and empower women. And then, Abe did exactly what his 10 predecessors all did: pressure the BOJ to ease and did zero to rebalance the economy.

This age-old strategy turned Japan into the ultimate monetary junkie, living monetary injection to injection. What Tokyo never quite got is that the amount of yen in the economy isn’t the problem, but uses for them. Without confidence that prospects will improve two to five years ahead, no one borrows, lends or speculates. It means the BOJ’s largess does little more than prop up government bonds.

That’s why Kuroda’s defiance Friday is so significant. He fully knew how much pressure there was for him to validate market expectations and placate politicians, and yet he refused to pour another round. Will Abe take the hint and do his job? All we can do is hope, considering how many times Abe has pledged to get serious only to punt again on big decisions. But given the surge in the yen, declining exports, and the return of deflation, Abe needs to put up or shut up about his reform plans.

The punchbowl Abe needs to fill is one of real wealth. He’s spelled out a fairly specific recipe for success, but stopped short at every turn to try it. Kuroda could do more, too, to monetize debt and expand asset purchases that boost confidence. But his reluctance to do so isn’t about laziness or cluelessness. Kuroda gets that easing further will imbibe the monetary junkies, but won’t end Japan’s 25-year malaise. Only a reformist cocktail of Abe’s making can boost growth to a level that’s eluded Japan for a quarter century.

Kuroda just made it clear it’s closing time. Will Abe take the hint or pound the bar for another punchbowl’s worth of yen? At least this much is for sure: it’s now Abe’s shout.

William Pesek, executive editor of Barron’s Asia, is based in Tokyo and writes on Asian economics, markets and politics. www.barronsasia.com

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.