Kuroda is increasingly isolated.

Photographer: Haruyoshi Yamaguchi/Bloomberg/Getty Images

Japan Is Running Out of Options

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The New York Times recently lit up the Japanese Twittersphere with a cartoon that was a little too accurate for comfort. In it, a stretcher marked "economy" is loaded into an ambulance with "Abenomics" painted on the side; the vehicle lacks tires and sits atop cinder blocks. Prime Minister Shinzo Abe looks on nervously, holding an IV bag.

The image aptly sums up Japan's failure to gain traction in its push to end deflation. The Bank of Japan's unprecedented stimulus and Abe's pro-growth reforms have yet to spur a recovery in inflation and gross domestic product growth, and the country is yet again in recession. Worse, BOJ Governor Haruhiko Kuroda is rapidly running out of weapons in his battle to eradicate Japan's "deflationary mindset."

Minutes from the central bank's Oct. 31 board meeting, at which officials surprised the world by expanding an already massive quantitative-easing program, show that Kuroda now has a budding mutiny on his hands. Many of his staffers think the central bank has already gone too far to weaken the yen and buy virtually every bond in sight. That's a problem for Kuroda and Abe in two ways.

First, board members warned that the costs of further monetary stimulus outweigh the benefits. We already knew that Kuroda had only won approval for his shock-and-awe announcement by a paper-thin 5-4 margin, and that Takahide Kiuchi dissented when the BOJ boosted bond sales to about $700 billion annually. But the minutes suggest Kuroda came as close to any modern BOJ leader ever has to defeat on a policy move. Cautionary voices like Kiuchi's worry that the BOJ could be "perceived as effectively financing fiscal deficits." I'd say it's too late for that. Of course the BOJ is acting as the Ministry of Finance's ATM, just as Abe intended when he hired Kuroda. Still, the fact is that Kuroda's odds of getting away with yet another Friday surprise are nil at best.

Second, maintaining stability in the bond market just got harder. The only way Kuroda can stop 10-year yields -- currently 0.44 percent -- from spiking as he tries to generate 2 percent inflation is by making ever bigger bond purchases. But fellow BOJ board members will be giving Kuroda less latitude to cap market rates. Japan is lucky in one way: Given that more than 90 percent of public debt is held domestically, Tokyo can the avoid wrath of the "bond vigilantes." Kuroda further neutralized these activist traders by saying there's "no limit" to what he can do to make Abenomics work. The fact that so many of his colleagues are skeptical of the policy, however, undermines Kuroda's credibility. If markets begin to doubt his staying power, yields are sure to rise.

The answer, of course, is for Abe to get more serious about deregulating the economy; that was the thrust of Kiuchi's dissenting vote last month. Unfortunately, progress on Abe's so-called third-arrow reforms is set to slow as Tokyo stops all business to contest a Dec. 14 election. The vote could well leave Abe with a smaller mandate for change than he won in 2012. Whatever the margin, though, the prime minister needs to act faster to increase competitiveness. Or the next thing being placed in an ambulance could be his premiership.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Willie Pesek at wpesek@bloomberg.net

To contact the editor on this story:
Nisid Hajari at nhajari@bloomberg.net