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Bank of Japan's Next Boss Must Shock Investors
Haruhiko Kuroda, the government's nominee to become Governor of the Bank of Japan, is a compromise. He agrees with Shinzo Abe, the new prime minister, that BOJ policy has been wrong. He has warned about the perils of deflation and called for more aggressive monetary easing. But so far, unlike Kazumasa Iwata, who was once in the running, he hasn't said the central bank should buy foreign bonds.
A decision to buy foreign bonds would make driving the yen lower an explicit goal and say "new rules" with startling clarity -- but it's controversial. Abe backed away from the idea at the recent G20 meeting. The Diet might have balked at Iwata. Kuroda stands a better chance of being confirmed.
Whether the yen is explicitly targeted or not, it's a measure of monetary conditions, and Abe's arrival has already made a difference. Anticipating new monetary stimulus, investors have driven the currency down by almost 10 percent against the dollar since Abe's election. That's good, but it sets up possible disappointment if the new governor fails to deliver. Assuming Kuroda is confirmed, he'll need to make an impact right away, and that's something BOJ culture resists.
The bank under its current governor, Masaaki Shirakawa, has made self-cancelling monetary announcements its specialty. Responding to Abe's demands for looser monetary policy, its board adopted a new inflation target of 2 percent at its January meeting -- then published a forecast for core inflation of less than 1 percent in 2014. Translation: "There's nothing we can do."
The bank needs to say it will do whatever it takes to raise inflation to 2 percent, and publish an inflation forecast that says it's not kidding.
What might "whatever it takes" mean? Certainly, Kuroda needs to commit the bank to quantitative easing on a much more ambitious scale. Announcing his new inflation target, Shirakawa did not revise planned asset purchases for the rest of this year. That's no use. Kuroda should ramp up the amounts and widen the range of securities to include long-dated government bonds, corporate bonds and even equities. There needs to be some shock and awe.
Beyond this, there are two "nuclear options", as Gavyn Davies calls them. First, an explicit exchange-rate target with a commitment to buy foreign bonds in whatever amount the target dictates. Second, an explicit fiscal-monetary pact with a big fiscal expansion directly monetized by the BOJ.
Japan's predicament is so bad that I could be talked into the second of these, at any rate. (Even if Abe changed his mind and went for the first option, an explicit exchange-rate target creates international complications: Japan couldn’t expect to do this unilaterally.) Abe and Kuroda might be up for ground-breaking fiscal-monetary radicalism, even though it trashes the concept of central-bank independence, but I doubt that many of the other BOJ board members would be.
It's going to be hard enough for the next governor to go the non-nuclear route of turbo-charged QE -- but that's the minimum Kuroda, supposing he's confirmed, will have to deliver.
(Clive Crook is a columnist for Bloomberg View. Follow him on Twitter.)