Haruhiko Kuroda’s second term as governor of the Bank of Japan — which appears almost guaranteed as the government has renominated him to the Diet, which is controlled by Prime Minister Shinzo Abe’s ruling coalition — will test the Abe administration’s bid to overcome the deflation that has gripped Japan’s economy since the 1990s.
Five years after Kuroda took the helm of the central bank, the economy is in good shape — the gross domestic product has expanded for eight quarters in a row for the longest growth run since the late 1980s bubble boom, and listed companies continue to post record profits. However, the 2 percent annual inflation target, which the central bank and the government set as a goal for busting deflation, remains nowhere closer to being achieved.
The reappointment of Kuroda for another five-year term — which, if approved by the Diet, will be the first time a BOJ chief has been given a second stint in 57 years — looks appropriate given the potential confusion over monetary policy that could arise from a change in the central bank’s leadership. The unprecedented monetary stimulus program that Kuroda launched upon being tapped by Abe to the post in April 2013 will likely be maintained for now.
Under the BOJ’s massive asset-purchase effort to inject more money into the economy, the strong yen that had hurt Japanese companies was tamed and share prices surged on the Tokyo Stock Exchange. On the strength of robust demand in overseas markets, listed major companies continue to post record profits. The current cycle of the economy’s expansion, which began when Abe took the government’s helm in December 2012, is believed to have become the second-longest in Japan’s postwar history. The nation’s gross domestic product has posted moderate growth for eight consecutive quarters through the last October-December period.
But even after Kuroda resorted to a negative interest rate policy — charging fees on part of the deposits that commercial banks keep in their accounts at the BOJ — the 2 percent inflation target, which the governor was initially confident of achieving within two years, has continued to be pushed back as the upward momentum of prices remained weak. In December, the consumer price index was 0.9 percent higher than a year earlier for the 12th monthly gain in a row. In 2017 as a whole, the average CPI was 0.5 percent higher for the first gain in two years, mainly on energy-related prices on the back of the increase in crude oil prices. CPI excluding energy and perishables rose a scant 0.1 percent, even slower than the 0.6 percent rise in 2016.
As far as the inflation target is concerned, Kuroda’s job of pulling the economy out of deflation through massive monetary easing remains a half-finished business — although the nation is at least not in a deflationary spiral, in which sustained falling of prices puts downward pressure on the economy. The past five years testify to the difficulty of pushing up prices through monetary policy alone. The government’s decision to nominate Kuroda for a second term may represent its confidence that prices will eventually rise as long as the monetary stimulus is maintained under his leadership of the BOJ, or it may reflect the administration’s lack of viable options other than to keep the 73-year-old governor on the job.
As Kuroda’s unprecedented monetary easing operation became protracted with achievement of the 2 percent inflation target still nowhere in sight, concern over its negative side effects has also grown. The ultra-low interest rates under the central bank policy has hurt the profitability of financial institutions, particularly regional banks that rely heavily on the lending business and face falling lending rate margins. There are worries that the decline in those banks’ profits discourages them from lending to clients instead of increasing the lending as is the policy’s intention.
The risk has been pointed out that the BOJ’s massive purchase of government bonds will erode the government’s fiscal discipline. As part of its asset purchase program for monetary easing, the BOJ has bought government bonds at a pace faster than the government’s annual issue, and the central bank’s total outstanding assets has topped ¥500 trillion — close to the level of the nation’s nominal GDP. Room for the BOJ to purchase more government bonds on the market appears to be declining, and there are views that the policy will reach its limits in the near future.
In his second stint, Kuroda will face as many challenges as in his first term. The next five years of his leadership at the helm of the BOJ will hold the key to whether Japan can follow through on its efforts to turn the economy around and achieve a more robust and sustained growth.
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