Japan Reflationists Score Biggest Win as Kuroda Confirmed
Japanese Prime Minister Shinzo Abe’s initiative to end two decades of economic stagnation took its biggest step yet as Parliament confirmed his picks for a new Bank of Japan (8301) leadership team.
Haruhiko Kuroda, who advocated an inflation target more than a decade before the central bank set one, won a majority of votes in the upper house a day after his nomination as governor was endorsed by the lower body. Abe’s picks for two deputies were also approved, with BOJ critic Kikuo Iwata prevailing after being opposed as too radical by some lawmakers.
Kuroda, the outgoing Asian Development Bank chief, has repeatedly said monetary policy alone can end the deflation that has afflicted the world’s third-largest economy for 15 years. His next task is corralling the nine-member board behind fresh stimulus, with options ranging from accelerating bond-purchase plans to setting a target for expanding the monetary base.
“The next focal point is whether Kuroda will hold an emergency meeting,” before the scheduled April 3-4 board gathering, said Shuichi Obata, senior economist at Nomura Securities Co. in Tokyo. “The BOJ is likely to extend the maturity of assets it buys and expand bond purchases.”
Japan’s stocks climbed after the confirmation votes, with the Nikkei 225 Stock Average (NKY) closing up 1.5 percent, double the gain in the MSCI Asia Pacific Index. The Nikkei closed at its highest since before the Lehman Brothers Holdings Inc. bankruptcy in 2008.
The yen was at 95.98 per dollar at 4:29 p.m in Tokyo, down more than 16 percent from mid-November, when an election was announced, spurring speculation that Abe would form a government committed to pressing for more monetary stimulus. The yen is now 28 percent weaker than the postwar high reached in October 2011, which had undermined Japanese export competitiveness.
“Expectations are extraordinarily high,” said Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong. “If policy makers don’t follow through, they will quickly see the yen rally again.”
The yen’s weakening has been predicated on expectations of monetary easing, a circumstance that won’t last forever, Kuroda, 68, told lawmakers in his second confirmation hearing this week. He said the central bank’s current scale of asset buying is “not a strong enough commitment to quickly achieve the 2 percent inflation target,” that it set in January.
Standard and Poor’s Senior Director Kim Eng Tan said the weak currency could undermine Japan’s credit worthiness if investors withdraw from yen-denominated assets, pushing up interest rates and increasing debt-servicing costs.
“It doesn’t seem like this risk is significant at this point, but that could change,” he said during a teleconference today.
Current governor Masaaki Shirakawa and his deputies step down on March 19, leaving two weeks before the new leadership’s first scheduled policy meeting. While an emergency gathering is possible, it’s unlikely unless financial market “volatility increases unexpectedly,” Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo, wrote in a research note this week.
Hiroshi Nakaso, 59, who has served as one of the senior- most career staffers under Shirakawa, said at a Diet hearing March 12 that he didn’t see a difference in the three nominees’ views. He said the central bank could have increased the magnitude of its easing in the past.
Iwata, 70, an academic at Tokyo’s Gakushuin University who has advocated greater monetary stimulus since the 1990s, told lawmakers on March 12 that the BOJ can achieve its 2 percent inflation target “within two years” solely through buying longer-term government debt.
Most lawmakers in the opposition Democratic Party of Japan, the largest group in the upper house, voted against Iwata today. DPJ policy chief Mitsuru Sakurai said this week that the party opposed extreme reflationists. Yoichi Kaneko, a member of the DPJ’s anti-deflation league, skipped the vote today to attend a meeting in Taiwan.
Kuroda is seen failing to achieve 2 percent inflation within two years, a time horizon he said in an interview last month was a global standard for reaching such targets. Only three of 15 economists surveyed this month by Bloomberg News were “very” or “somewhat” confident the BOJ will get 2 percent inflation within that period.
“CPI will never reach 2 percent,” Eisuke Sakakibara, Kuroda’s direct predecessor as vice finance minister in charge of currency policy in the 1990s, said in a Bloomberg Television interview. “This deflation is structural. It’s a result of the integration of the Japanese economy with the rest of east Asia and it has taken place for the last 20 years.”
Sakakibara also said “Iwata is a little bit too extreme,” and that his views “will be watered down by Kuroda.”
Economists including JPMorgan’s Kanno say that a key to ending deflation is higher wages. Toyota Motor Corp. agreed this week to pay its employees in Japan the biggest bonus in five years as the world’s largest automaker expects its net income to triple this fiscal year.
Minutes released this week from the BOJ’s February policy meeting showed that some members of the board said options for easing include buying longer term bonds, and a few members said the bank might have to consider combining bond purchases with outright purchase operations, known as rinban.
Shirakawa, a compromise for governor in 2008 after two candidates failed to get parliamentary approval, told lawmakers today that viewing monetary policy as solely a matter of quantity of asset purchases is ineffective and efforts to boost growth can increase the impact of stimulus.
Finance Minister Taro Aso echoed that view, saying in Parliament today that quantitative easing alone won’t end deflation and warned that trust in Japan could be lost if the BOJ is seen as directly financing government debt.
He pledged to build on the BOJ’s easing with an effective growth strategy and later told reporters he wants firms to increase wages and investment as they enjoy the benefits of a weaker yen and rising stocks.
Iwata, who has called for revising the law setting the central bank’s mandate to give the government more say in setting policy goals, was confirmed with 124 lawmakers voting in favor and 96 opposed, according to a statement from the upper house. The nomination was passed with the help of smaller opposition parties, along with the ruling Liberal Democratic Party and its coalition partner New Komeito.
Kuroda’s nomination was passed with 186 lawmakers voting in favor and 34 against, while Nakaso drew 199 votes in favor and 22 opposed.
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