Commentary / Japan

The Bank of Japan's head deserves a second term

Haruhiko Kuroda's bold ideas put some life into a moribund economy, which is more than his predecessors could claim

by Daniel Moss

Bloomberg

U.S. President Donald Trump isn’t the only leader with a big economic hire to make.

His Mar-a-Lago golf partner, Prime Minister Shinzo Abe, has to decide whether to reappoint Haruhiko Kuroda as governor of the Bank of Japan. Kuroda’s term expires next April, two months after Janet Yellen’s at the U.S. Federal Reserve.

There are powerful reasons for Abe to break with tradition and give Kuroda a second turn. Since the BOJ gained independence two decades ago, no governor has been reappointed. For most of that time, Japan’s economic performance was truly disappointing and the country’s leaders felt the bank hadn’t been aggressive enough in turning the tide against stagnation and deflation.

While Japan’s economy isn’t in a great place now, it is going through a relatively sunny patch, with global growth spreading as projected last month by the International Monetary Fund.

Gross domestic product has been rising for five quarters. That might not sound like a lot, but it’s the longest uninterrupted spell since 2006. Inflation isn’t close to the BOJ’s 2-percent target, but at least it’s not deflation. Why disrupt things with a change at the top?

Aside from Abe himself, no other official is as closely associated with Abenomics, the prime minister’s trademark effort to reinvigorate Japan. Since Abe tapped Kuroda in 2013, the central banker has opened the monetary floodgates like none of his predecessors. In a culture that favors consensus, some the most important decisions split the BOJ’s nine-member board.

Kuroda has valued surprise in his efforts to shock Japan out of what he’s called the “deflationary mindset,” where years of stagnant or falling prices have conditioned businesses and unions to be too conservative in their ambitions and demands. The decision to cut interest rates to below zero was a shocker that still reverberates. It was done without warning in a 5-4 vote. In the lead up to that decision in January 2016, Kuroda denied it was even being considered.

All that monetary activism means he does have baggage. Negative interest rates and their impact on aging savers and regional banks have been unpopular with backbenchers of Abe’s Liberal Democratic Party. Abe’s political capital has been eroded by scandals, ministerial gaffes and an LDP drubbing in Tokyo metropolitan assembly election.

Kuroda’s fate may hinge on how much of a reboot Abe feels he personally needs. The prime minister’s job isn’t in immediate danger, and he still controls a majority in both houses of parliament. Yet polls show his popularity slipping.

Who might Abe turn to if not Kuroda? Chatter in Tokyo economic circles focuses on four men: Takatoshi Ito, a Columbia University professor and former Finance Ministry official; Financial Services Agency commissioner Nobuchika Mori; Masayoshi Amamiya, a senior BOJ official; and Etsuro Honda, a former Abe economic adviser who is now Japan’s ambassador to Switzerland.

How might any of them differ from Kuroda? The path for at least the immediate post-Kuroda years may already be laid.

The most recent bank forecasts, just a few weeks old, projected that the bank’s inflation target won’t be met until 2019. As long as 2 percent is the target, the BOJ is bound to build policy around reaching it. And while consumer prices are no longer declining — itself a victory — some economists privately doubt that the target will be reached until well into the next decade. If at all.

One thing to keep an eye on: the tribulations of regional banks that are being pushed into taking greater and greater risks to maintain profitability amid the BOJ’s negative interest rates. The BOJ’s semiannual financial system report published late last year dwelled on the matter.

Regional lenders, bearing the brunt of an aging and shrinking population, are increasingly unable to cover their expenses with interest income and revenue from fees and commissions, the report said.

It might be tough for Kuroda to walk back negative rates, given how closely associated he is with the policy. A successor might more easily deny that aspect of past and appease a few LDP backbenchers in the process.

Then again, Kuroda is a pragmatist. Years of running the Finance Ministry’s currency policy, including when and how to intervene in markets, taught him that.

Whether Kuroda is replaced or not, the next few years look sure to bear his imprint. Abe should let him finish the work he started.

Daniel Moss has been the executive editor of Bloomberg News for global economics. He has led Bloomberg News teams in Asia, Europe and North America.

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