No Honeymoon for Japan’s New Central Banker
As president of the Manila-based Asian Development Bank, Haruhiko Kuroda spent the past seven years confronting the challenges posed by 48 diverse, dynamic and complex Asia-Pacific economies. If he thought that was hard work, consider what awaits him in Tokyo as he prepares to lead the Bank of Japan.
Kuroda, 68, can forget about a honeymoon period to get his bearings in a city he has lived away from since 2005. Markets are fed up with Japan’s lost decades, a period characterized by deflation, the hollowing-out of industry and a political revolving door that has spat out 16 prime ministers since 1990. They want decisive and immediate action.
Here are four priorities that should top his lengthy and tricky to-do list.
First, announce his arrival loudly. “Kuroda needs to send a message with a firecracker attached that the BOJ is under new management now,” says Nicholas Smith, a strategist at CLSA Asia-Pacific Markets Ltd. in Tokyo.
Current BOJ Governor Masaaki Shirakawa has wasted time printing yen to buy short-term Treasury bills maturing in one year or less, which is essentially swapping cash for cash. It’s the central-bank equivalent of money laundering. Kuroda must buy up huge blocks of 10-year bonds from his very first policy meeting. The idea is to front-load fresh quantitative-easing efforts and then let the markets fuel the momentum.
Hedge-fund managers are way ahead of Prime Minister Shinzo Abe’s BOJ pick. Just ask George Soros, who is said to have made almost $1 billion since November from bets that the yen would tumble. Anything that disappoints markets could send the yen skyrocketing and end the positive buzz surrounding “Abenomics.”
The Federal Reserve could teach the BOJ a thing or two about the unconventional policies that Tokyo invented; they have worked out better in the U.S. than in Japan. Richard Jerram, the chief economist at Bank of Singapore Ltd., offers this advice: “One, read the Fed’s minutes of past five years. Two, read Fed policy statements of past five years. Three, cut and paste.”
Second, clarity matters. The good news for Kuroda is that the bar on this score is very low. From Governor Yasushi Mieno, who pricked the 1980s asset bubble, to Masaru Hayami to Toshihiko Fukui to the outgoing Shirakawa, the BOJ’s leaders haven’t made communication their forte. Along with conveying that Japan is back, Kuroda must be transparent about how he plans to get banks to lend and businesses and consumers to borrow.
It’s all about confidence. Japan’s 126 million people must believe that five years from now their fortunes will improve. Workers must trust that paychecks will fatten. Companies must have faith in higher consumption. Banks must have confidence that new loans won’t go bad. Just about all of the excitement over Abenomics is coming from abroad, from Soros and his ilk. Ending deflation means convincing those who really matter: Japanese.
Third, pressure the government for change. Those who put the onus on the BOJ forget that deflation is a symptom of what ails Japan. Abe’s revitalization plan rests on two rather tired ideas -- massive public-works projects and more monetary stimulus. Absent are steps to improve Japan’s economy, including tax reform, deregulation, joining free-trade agreements such as the Trans-Pacific Partnership, empowering women, supporting entrepreneurs and increasing productivity. Lots of talk, zero action.
“Tackling deflation requires much more than setting a target and opening the spigots,” says Jeff Kingston, head of Asian studies at the Tokyo campus of Temple University. “Abenomics so far has only two arrows so everyone wants to see progress on structural reforms, the missing arrow, but that is a long-term process.”
Kuroda can help drive it by playing an honest-broker role. After doing his bit to revive the third-biggest economy, he could turn to Abe’s Liberal Democratic Party and say, “It’s your move now.” Kuroda will have the gravitas to prod lawmakers to upend a rigid, change-resistant economic model that is holding Japan back as Asia races forward.
Fourth, beware reputational risk. It’s widely assumed that the next BOJ head will be Abe’s lapdog. Kuroda’s job, the financial intelligentsia reckons, is to open the yen faucet as widely as possible. If Abe says we need more liquidity, according to this view, Kuroda will yell “Hai!” and dutifully boost the money flow.
It’s quite a paradox. Markets like Kuroda because of the credibility he brings to the job. He oversaw foreign-exchange issues at the Finance Ministry from 1999 to 2003 and made the ADB much more influential. Now, this respected economist is supposed to leave all he has learned at the door and be Abe’s monetary creature?
Kuroda must avoid such a fate. He must generate a genuine and organic recovery, not just the next giant asset bubble. In preserving his own reputation, Kuroda will improve Japan’s, too.
(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)
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