More than a year after securing support at the Bank of Japan for unprecedented monetary stimulus, Governor Haruhiko Kuroda has yet to persuade most board members that they have the power to achieve their inflation target.
A majority of the nine members disagree with Kuroda’s view that flooding the economy with cash is sufficient to get stable 2 percent gains in consumer prices, according to people familiar with their thinking. Most conclude it cannot be done without government steps to raise Japan’s growth potential, they said, asking not to be named because the discussions are private.
The ideological gap, masked in public remarks by most board members, underscores why some reflationist lawmakers are still pushing for legislation that would hold the BOJ responsible for delivering on its target. Debate may become more public should calls for expanded asset purchases escalate in face of inflation falling short of the goal next year.
“There may be some members who don’t get it, so we have to make sure the BOJ law is revised,” Liberal Democratic Party lawmaker Kozo Yamamoto, who has advised Prime Minister Shinzo Abe on economic policy, said in an interview in Tokyo last week. “The BOJ has to be held accountable.”
Kuroda, 69, became central bank chief in March 2013 after having been a critic for years, when he had urged an inflation target and liquidity injections to end the deflation that became entrenched in Japan in the 1990s. Abe nominated Kuroda as the new BOJ governor weeks after surging to victory in a December 2012 election on a campaign platform of reflation.
The Topix index of shares climbed 0.8 percent in morning trading in Tokyo. The yen slipped 0.1 percent to 101.45 per dollar at 12:13 p.m.
The former Finance Ministry bureaucrat who led the Asian Development Bank for eight years arrived at an institution that had missed early signs that consumer price declines were heading for a sustained slump. He followed a succession of governors who had argued that the role of monetary policy in fueling inflation was limited.
Even so, with public approval for Abe’s government at around 70 percent in April 2013 and a clamor among lawmakers and officials for action to deliver on the prime minister’s reflation pledge, BOJ board members swung behind Kuroda and voted for his unprecedented program of asset purchases.
The members voted unanimously to expand the monetary base at an annual pace of about 60 trillion yen ($593 billion) to 70 trillion yen, a commitment reaffirmed at last week’s policy meeting. Deputy Governor Kikuo Iwata, an academic who had criticized the central bank as long ago as the early 1990s, had argued for an expansion of the monetary base before he joined.
Unanimous voting on policy has masked a deeper debate within the central bank on the cause of deflation and the ability of monetary policy to achieve the 2 percent goal, according to people familiar with the discussions.
Kuroda predecessor Masaaki Shirakawa, a career central banker, reflected the views of many of his colleagues in blaming a lack of demand for falling prices. Shirakawa emphasized the need to address Japan’s shrinking population and low potential growth rate. There was no “magic wand” to stop price declines, he told an audience in January 2010.
“There is no way Kuroda has changed the fundamental thinking on monetary policy and the economy held by each board member,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo, who used to work at the BOJ. “Over the course of trying to achieve a stable price target, we are likely to see divisions on the board, either when they need to discuss more easing or an exit.”
Monetary stimulus helped send the yen down 18 percent against the dollar last year, stoking inflation by raising the price of fossil fuels, imports of which have surged in the wake of a shutdown of Japan’s nuclear reactors. Consumer prices excluding fresh food, the core measure favored by the central bank, rose 1.4 percent in May from a year earlier, leaving out the effects of a sales-tax increase.
In debate is whether prices will keep rising after the impact of the weaker yen and higher energy costs passes. The median forecast of the BOJ’s board points to 1.9 percent inflation in the year starting in April 2015. By contrast, Kanno’s team at JPMorgan sees a 1.3 percent pace.
While Kuroda has urged Abe to press ahead with efforts to increase the economy’s potential growth rate, estimated by the BOJ at around 0.5 percent, he has indicated the central bank’s job doesn’t hinge on the government’s progress in boosting the productive capacity of the world’s third-biggest economy.
“The bank’s mission to ensure price stability remains unchanged irrespective of the level of the potential growth rate,” Kuroda said on June 23. “Even if the potential growth rate doesn’t rise, this wouldn’t make it any more difficult for monetary policy to achieve the price-stability target.”
In an interview a month before he became governor, Kuroda, a former top currency official at the Finance Ministry, said the BOJ could stoke 2 percent inflation on its own, a view he has maintained for more than a decade.
Most explicit in public comments playing down the ability of BOJ policy to secure the target is Takahide Kiuchi, who has proposed that the bank describe its goal as a project for the “medium to long term.”
“The economy is more of a decisive factor than the BOJ in getting us to a state of stable inflation in a desirable manner,” Kiuchi, who joined the board in 2012, said at a press conference during a visit to Shiga, western Japan, on March 19.
Koji Ishida, who took his seat on the board in 2011, highlighted in a February speech that the inflation target was made “concurrently” with a government pledge to strengthen growth potential and competitiveness. Board member Ryuzo Miyao echoed that view on April 10.
“It’s natural for some board members to remain skeptical, as achieving stable inflation without strengthening the economy is a radical idea,” said Hideo Kumano, executive chief economist at Dai-ichi Life Research Institute in Tokyo and a former BOJ official.
Such skepticism is what concerns Yamamoto, who held study groups on monetary policy as Abe was preparing a path back to the political limelight years after a term as prime minister that ended in 2007 with illness and resignation.
Kuroda, who in 2002 had called for “innovative, non-traditional anti-deflationary policies” at the central bank, is in the second year of a five-year term. The BOJ law should be revised before the end of the term in 2018, to specify that the central bank is responsible for achieving a 2 percent price-stability goal, Yamamoto said last week.